Editorial Board

U.S. Economy Uptick Doesn’t Eliminate Challenges Ahead: View

(Updates with December employment figures in second paragraph.)

The year is under way and the screens, news pages and airwaves have been filled with assessments, some contradictory, of America’s economic health.

Let’s spell out where we stand. The U.S. economy is healthier than could have been expected only a few months ago. Employers added 200,000 workers in December, pushing down the jobless rate to 8.5 percent, almost a three-year low. Manufacturing expanded in December at its fastest rate in six months; auto sales are up; the housing market is showing signs of stabilizing; and consumer spending probably grew faster in the last three months of 2011 than it had since the last quarter of 2010.

Still, any sense of security is misbegotten. On average, forecasters expect the economy to expand at a rate of slightly more than 2 percent in 2012, well below its long-term potential and not fast enough to withstand the kind of shock that could come from Europe’s festering debt crisis or a hard landing in China. Consumers are boosting spending partly by saving less -- a trend that isn’t sustainable unless an increase in hiring creates new income. At the rate of job creation in the three months through November, employment won’t return to its pre-recession level until 2015.

More Stimulus

Here’s the troubling part: It’s unrealistic to expect officials in Washington to do much to shore up this fragility anytime soon. The best we can hope for is to have President Barack Obama and Congress negotiate a bit more stimulus, such as extending payroll-tax breaks and unemployment insurance through the end of 2012.

Even with those measures, economists at Goldman Sachs Group Inc. estimate that waning government spending will shave about three-quarters of a percentage point from gross-domestic-product growth this year. While slowing inflation may give the Federal Reserve more leeway to act, political gridlock will probably prevent further fiscal steps. It’s a shame: With interest rates at historic lows and an army of construction workers unemployed, there has rarely been a better time to invest in American public works.

In the longer term, economic clarity will be hard to come by until the U.S. demonstrates it can get its finances under control. This is a crucial prerequisite for robust growth, and for avoiding the kind of market-imposed austerity that is now driving Europe into a recession. It’s also a much bigger task than Obama or anyone in Congress seems willing to recognize.

Even if the $2.4 trillion of cuts in last year’s debt-ceiling deal are put in place, the U.S. government faces a structural budget deficit -- the chronic shortfalls that would continue even if the economy returned to peak performance, but which must be closed to achieve long-term sustainability. According to Alan Auerbach of the University of California, Berkeley, and William Gale of the Brookings Institution, that gap is about 5.5 percent of GDP annually, or almost $11 trillion over the next 10 years.

Making the wealthy pay something closer to their historical tax rates -- as Obama has suggested -- is a good start, but redistribution alone won’t solve the problem. Ultimately, everyone will have to contribute -- in the form of increased taxes, curtailed services or both. The longer we wait, the worse the problem will get: Auerbach estimates that another five years of current policy would bring the structural budget deficit to 5.8 percent of GDP a year.

Optimism is always nice at the beginning of a fresh year. But in the case of the U.S. economy it’s vaguely discordant given the scant chance that legislators can agree on needed reforms: a simplified tax code, increased revenue, a tax burden weighted toward consumption, a plan to rein in the costs of Medicare and Social Security. Unless we elect leaders, in the White House and Congress, willing to make these changes happen, Americans will still be living with a murky outlook when the next new year comes.