Ask any stats student at any school in the world what the most important lesson in statistics is and they'll all say the same thing: "Correlation is not Causation." But, printed as that aphorism is on the sides of each student's head, the false appearance of causation has begun to dictate how the United States approaches economic policy.
The two biggest concerns facing the country right now are jobs and the budget deficit. These two problems are distinctly separate, but they operate together in a way that gives the appearance of a particular causation, so much so that naming them separately sounds almost redundant these days. It's all 'The Economy.' The job outlook is terrible as well as the deficit outlook, and they both turned bad about the same time. Nonetheless, and let's say it all together now, correlation is not causation.
The dominant discussion in Washington is the economy (", stupid"), with an emphasis on jobs and the deficit. Over time, as positions congealed and deadlines spurred fights, the outlook has essentially hardened into "we need to cut the deficit to create jobs," not 'AND create jobs' but 'TO.' The causation implicit in this position is fundamentally false.
By conflating two problems as the same one, both political parties have done a huge disservice to their constituencies and, in one case, themselves. This position makes political sense on the part of the Republican Party as it both tacitly recommends a smaller government on objective terms (one of their subjective goals) and it tags the party in power with the responsibility. President Obama's acceptance of this premise of causality and the flawed thinking behind it was perhaps one of the most destructive outcomes of this summer's recent debt ceiling battle.
His jobs speech today does represent a welcome reversal of that stance, not too mention a welcome spending initiative, but nonetheless still implicitly accepts the notion that the deficit causes job loss.by aiming to ensure that "the American Jobs Act will not add to the deficit." Ultimately, aligning himself with this false premise was a political mistake as well as an arithmetic one.
The equation for the annual deficit is essentially as follows:
Deficit = Revenue - Spending
(which, very broadly, is equivalent to...)
Deficit = Tax Rate x GDP - Spending
Because of this basic identity, a recession that lowers GDP and compels increased spending (on welfare and the like) will cause the deficit to go up, all else equal. The reverse is also true: as the economy does better, the deficit shrinks. It isn't politics; it's just math. This link makes up the correlation that people witness, particularly when the economy sputters and attention sharpens on job growth. The true 'causation' here isn't some complex murky process like so much of economics: it's the simple adding up of what the government spends against what it takes in.
As evident in the admittedly simplified equation above though, this connection is a mathematical identity rather than a force of causation. The time of day, for instance, isn't 'caused' by the position of the sun in the sky; they just fundamentally represent one another, considering some extra variables like time zones (or tax rates). The sun is a simple comparison, but one that a number of people seem to enjoy.
Conflating the two issues of growth (i.e. jobs) and the deficit poses greater risks than angering statistics professors, physically imposing as they are. The policy conclusion one comes to with that conflation is squarely what one finds to be needed without it. If apparent political dogma were true and cutting the deficit created jobs, we should cut the deficit immediately. Unfortunately, because it isn't true, we can't rely on that simple prescription. Speaking broadly, cutting spending and increasing taxes both hurt job growth. The kinds of spending and taxes involved matter a tremendous amount and the overall point isn't true for every tax or every spending category, but it is the basic relationship.
So, to grow jobs, we actually need to also grow the deficit in the short term, not shrink it. It's kind of like saying, "You have to spend money to make money," except it's exactly like that. Without a magical force of causation from deficit shrinking to job growth, this measure is unfortunately a short term necessity. In the long term however, deficit reduction is also a necessity. The line between short term and long term, considering the tremendous economic uncertainty, is the tricky part.
The distinction between short term and long term concerns is a crucial one. The recession is a painfully current issue while the debt burden is one that extends out into the future. Bridging the difference between the two is essentially a matter of a discount rate, or the time value of money. In that sense, a need for more debt at one time period and less debt at a later one are mathematically compatible. This argument essentially advocates: More Deficit, Less Debt.
The deficit is the annual gap between the roughly $3 billion the government spends and the $2 billion it takes in, as made up for with debt. The capital-D 'Debt' is the cumulative total of these annual shortfalls. Short-run stimulus and long-run debt reduction efforts make a sensible combination, but the challenge is both the needle-threading choice of a turning point, not too mention the woefully misguided political dogma.
This point isn't a new one. In fact, if the thesis of this post sounds achingly commonplace to you, congratulations - you have most of the country beat.