The stock market wildly swings from day to day. S & P downgrades U.S. bonds. Confidence in our political system understandably falters after the manufactured debt ceiling debacle. What are we to make of all this.
On cue, the deficit hawks see this as further evidence of the need to ratchet up efforts to address our long-term deficits. The Committee for a Responsible Federal Budget, for instance, claims “Policymakers need to heed this warning and enact more aggressive deficit reduction that results in stabilizing the debt.”
This is exceedingly misguided. The issue at hand is the need for stronger growth, both here and in Europe. The only plausible economic reason to take action about deficits that are five, ten, fifteen or twenty years away is if it gave us more room in the next few years to have greater government spending to fuel job growth while having higher deficits. That’s not what CRFB or others have in mind and we should resist any efforts to reduce deficits in the near-term which will only serve to slow growth and raise unemployment further.
As many economists have pointed out what we are observing is clearly not fear of U.S. indebtedness or an inability to pay our debts. If that were the case we would see stocks fall and the price of U.S. bonds fall (and interest rates rise to persuade investors to hold the bonds!). In fact, interest rates on ten year bonds have fallen each day from last Friday’s 2.56% rate, to 2.32 to 2.25 and closing at 2.11 on Wednesday. Interest rates have not been this low since the OMG moments in late 2008!
Rather, we’re seeing concern that growth was miserably low in the first six months, that the debt ceiling deal will cut growth further and any response to the S & P downgrade may accentuate spending cuts. Plus, European growth prospects are worsening.
Unfortunately, doing anything to fuel growth and jobs in the near term does not seem to be a priority for either party. The GOP has no political interest in having more growth prior to the 2012 election and what they are proposing–deep and immediate spending cuts–will actually produce the double dip that is now gripping the media world. There is no evidence that deficit reduction, when we have more than 9% unemployment, will do anything to create jobs and much experience to show that it will weaken growth and raise unemployment. Great Britain anyone? U.S in 1937? The GOP diagnosis that job growth isn’t occurring because of anxiety of Obama regulations is also unfounded. It certainly does not match what firms are actually doing. Businesses have been investing in equipment and software to a greater extent than would be expected given the decline of the economy and the faltering demand for goods and service. Private sector employment has grown faster in this recovery than the one under George W. Bush. If firms were concerned about hiring new people they could certainly use their existing employees more, which they are not doing since weekly work hours are still significantly below pre-recession levels. No, job growth has been limited by the fact that the demand for goods and services per person is still substantially below what it was in 2007. Plus, if you look what small businesses say in the NFIB survey it is that poor sales are their biggest problems. They also complain of taxes and regulations, which is hardly breaking news. More interesting is that their stated worries about regulation and taxes is lower under Obama than under any other president since Carter.
Which brings us to the administration. My metric for being serious about jobs is whether a program will significantly lower expected unemployment, which the Blue Chip consensus now says will be 8.5% at the end of 2012. Others, such as Goldman Sachs (who has been more accurate) expect 9.3% unemployment then. The President expresses concerns about jobs but his approach will not move the dial at all. First, all this talk about removing ‘red tape’, patent reform and new trade treaties should be dismissed since they either will not help on the jobs front (i.e. trade) or they will not possibly help in the next year and a half. Second, the President wants to continue the payroll tax holiday and the emergency unemployment benefits program. This is important to do, and should have been done by now. However, we already have these supports in place so they will not really improve our prospects even though losing them will hurt. The infrastructure bank is a great idea but even more important would be to pass the transportation bill before Congress at much higher levels of spending. Last, it is hard to square the President’s concerns about jobs with the debt ceiling deal which essentially prohibits anything worth doing. On the one hand the amount of debt allowed is so tight that further deficit spending is not possible, and anything that’s paid for will necessarily be weak tea. On the other hand the discretionary spending caps prohibit, well, new spending!
So, America, we have to break out of this policy box or we will be locked into persistent high unemployment as far as the eye can see.
Note: This commentary originally appeared in The American Prospect.