Less Talk, More Stimulus
Anyone expecting bold new ideas to resuscitate the economy from President Barack Obama’s speech on Thursday probably came away disappointed.
It’s not that Obama’s proposals -- a mix of tax credits for small businesses and clean energy, and spending on infrastructure and education -- are bad. It’s just that they’re shopworn and too timid to break the political stalemate in Washington. The Democratic president effectively showcased the differences between his vision and Republican candidate Mitt Romney’s plan for a rollback of regulation and $5 trillion in new tax cuts. Unfortunately, drawing these distinctions won’t do much for the U.S. economy; it’s stalling now.
As in the past two years, economic growth seems to have petered out midyear. Gross domestic product is now expected to increase just 2 percent in 2012, too little to bring down unemployment in a meaningful way. A Federal Reserve report released this week shows the blunt force trauma of the recession, which erased almost two decades of Americans’ wealth and sent the median net worth of families plummeting to $77,300 -- a level not seen since 1992. Private payrolls remain below 2001 levels, meaning not a single net private-sector job has been created in more than a decade.
It’s no wonder Federal Reserve Chairman Ben S. Bernanke practically begged lawmakers last week to take some of the burden off the Fed’s shoulders and help goose the economy.
Election-year politics and entrenched Washington gridlock have stymied most of Obama’s spending proposals. Breaking through will require more political ingenuity than the president has shown. Still, he ought to have plenty of incentive: His job is at stake.
So how might one devise a plan to satisfy Republican calls for tax cuts and austerity and Democrats’ desire for increased spending to stimulate job growth and help the middle class? Here’s one idea: Pair a one-time tax rebate with long-term deficit reduction similar to that offered by the Simpson-Bowles fiscal commission. Such a move would allow Republicans to claim a spending-cut victory while allowing Democrats to take credit for putting a sizable check in workers’ pockets.
The cudgel to promote action is the so-called fiscal cliff, the unholy combination of more than $600 billion in tax increases and spending cuts slated to take effect in January. The nonpartisan Congressional Budget Office says that if the government fails to extend expiring tax provisions and to blunt the scheduled spending cuts, growth will slow to 0.5 percent, with the economy contracting at an annual rate of 1.3 percent in the first half of 2013 and expanding 2.3 percent in the second half. In other words, we could be back in a recession.
The rationale for additional government spending at this moment is compelling: Interest rates are near a historic low, and long-term unemployment is threatening the future of millions. More than 5 million of the 12.7 million people who are unemployed have been jobless for 27 weeks or more, a higher portion than at any time over the past 60 years. A new paper by former Obama economic adviser Lawrence Summers and Berkeley economist J. Bradford Delong suggests that under current conditions stimulus could ultimately be self-financing; it would put people back to work and increase the tax base, thus reducing the long-run debt burden.
To be effective, a new stimulus must be temporary, targeted and big enough to break the economy’s inertia. A rebate can offer more bang for the buck than other forms of tax relief, in part because rebates are often perceived by recipients as a bonus that they can afford to spend. (We are a consumer-driven economy.) By contrast, research shows that most recipients didn’t even notice the tax relief from Obama’s 2009 Making Work Pay credit, which provided an average tax cut of $508. Another benefit: Rebates have no risk of becoming permanent, unlike payroll tax cuts, which are difficult to claw back.
Yes, a tax rebate will only further inflate the federal deficit. That’s an unfortunate necessity. It’s also why any such expense now should be paired with a detailed framework for long-term deficit reduction. A good blueprint for fiscal rectitude is the report by the Simpson-Bowles commission, which sensibly calls for spending caps, reducing tax rates, eliminating backdoor tax breaks and reforming entitlement programs such as Social Security.
Speaking in Ohio, Obama said he sees a determination to overcome the challenges we face. It would be nice, in the days ahead, to be able to say the same about Democrats and Republicans, incumbents and challengers alike.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.