Officials in each party claim that balancing the budget in the near future would reduce long term employment. Republicans say that substituting tax revenue for debt would be a “job killer,” while Democrats refer to spending cuts as “austerity.”
Yet consider the most important factors that contribute to total employment–the size of the working age population and the willingness of working age people to actively seek paid employment. These factors contributed mightily to US economic growth in the last half of the twentieth century, when the vast Baby Boom generation and a soaring percentage of females joined the workforce.
As the economy has recovered from the Great Recession of 2008, the number of people employed has grown more slowly than predicted. Put another way, employment did not rise as fast as the official rate of unemployment of those seeking work declined. Economist John Cochrane recently reviewed the debate among economists about the reason for the changes in the employment/population level and ratio.
My own interpretation of these statistics: The retirement of almost 80 million Baby Boomers has and will dampen growth in employment. In addition, some workers in that generation retired earlier after losing their jobs and had difficulty finding employment without either retraining or relocation. Some initially lost their jobs because of the recession and others were casualties of the changes in the demand for US labor in a world of global competition. (Statistics show clearly that a disproportionate number of males left the workforce earlier than predicted.)
People can debate a variety of proposals about how to boost employment–better training and retraining of workers, higher rates of lawful immigration, reduction in any assistance that makes work an option rather than necessity, better various state and local economic redevelopment efforts in areas of persistent high unemployment, etc.
So what do demographic changes contributing to slow growth in employment have to do with the issue of whether the federal government should balance its budget? The answer is simple: In the short term, little to nothing. That conclusion alone is important.
As described in Ch. 22 of my book, both economic theory and US economic history undermine the notion that economic growth depends on spending more than available tax revenues (or imposing taxes insufficient to pay for routine spending. )
Rather than rationalizing continued borrowing as a means of sustaining employment, elected officials should focus on one fundamental reality: debt service that rises faster than national income will tend to leave less of each tax dollar to pay for valued services. For that reason, a nation with an aging and slowly growing population should be especially wary of high levels of public debt.