A Look at the Impact of Deficit Reduction on Black Unemployment

A Look at the Impact of Deficit Reduction on Black Unemployment

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The draft recommendation on deficit reduction issued by the co-chairs of the National Commission on Fiscal Responsibility and Reform has been drawing mixed reviews from academics, analysts, the general public, and particularly from African Americans.

According to a survey conducted by The Wall Street Journal, half of African Americans do not like the draft proposal issued by Commission co-chairs Alan Simpson, former U.S. Senator from Wyoming, and Erskine Bowles, staff director to former president William J. Clinton. The co-chairs issued five main policy proposals to start getting the deficit under control beginning in fiscal year 2012.

Deficit is defined where government expenditures and outlays exceed government revenue. According to data from the White House and the Office of Management and Budget (OMB), the deficit for fiscal year 2010 is estimated at $1.6 trillion. This represents approximately 10.6% of the nations total output, or gross domestic product (GDP).

The Commission’s five policy recommendations include:

  1. Capping discretionary spending and producing $200 billion in savings in 2015.
  2. Reforming the tax code so that both tax rates and deficits are reduced.
  3. Addressing the “doc fix” for Medicare by streamlining the process for doctor payments and reducing other costs for delivering health care.
  4. Achieving mandatory savings from farm subsidies and military and civil service retirement.
  5. Reforming Social Security including taking initiatives to make the system solvent and ensuring monies in the social security fund are not use to reduce deficits in the federal budget.

The issue of deficits has been a political football for years, but has drawn intense scrutiny and criticism from academics and particularly the Republican Party since President Obama signed into law the American Recovery and Reinvestment Act in February 2009.

For example, the federal deficit for fiscal year 2008 was $459 billion or 3.2% of GDP. By the end of fiscal year 2009, the federal deficit had climbed to $1.4 trillion, an increase of 208%.

Politically, Americans dislike deficits, viewing them as indicative of irresponsible government. Some economists view them as necessary, at least in the short term, for spurring growth in the economy. The Commission does not appear to hold this view, given its charge to propose measures that would make government fiscally responsible, including reducing the deficit and the level of entitlements.

Whether the co-chairs’ proposal would have a positive impact on the economy of the African American community is questionable at best. For example, there is a clear correlation between rise in unemployment, both for the general labor force and blacks in particular, and the growth in federal deficits. For example, as the unemployment rate for blacks in fiscal year 2008 increased from 11.2 % to 15.3% in fiscal year 2009, the deficit increased 208%. As more people become unemployed, the government collects smaller amounts in tax revenue, which results in higher deficits.

While the co-chairs’ draft speaks to increasing some taxes and cutting unnecessary entitlement programs, it barely speaks if at all to the apparent structural unemployment gripping the nation. Structural unemployment, the inability to match unemployed workers with jobs requiring particular skills, may have to be addressed with more vigorous policy if deficits are to be brought down in a meaningful way.

In the meantime, entitlement programs such as unemployment insurance and food stamps may find themselves on the cutting room floor leaving many unemployed African Americans without a necessary safety net as unemployment continues to remain in the double digits throughout 2011.

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