A familiar economic foe

Updated
 
A familiar economic foe
A familiar economic foe
New York Times

There’s no shortage of issues Americans would like to see elected policymakers address, but Gallup this week found that job creation and economic growth remain the public’s top priority – by a sizable margin.

With that in mind, President Obama will appear in Austin in just a couple of hours, placing renewed emphasis on his economic agenda and hoping to pressure Congress to focus on the issue that’s been largely forgotten among many lawmakers: the fragile economic recovery.

I don’t yet know what the president will say, but I know what economic message I’d like to hear.

The New York Times reports today on the one thing we know is preventing a more robust recovery: Congress and its austerity measures.

The nation’s unemployment rate would probably be nearly a point lower, roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011, according to private-sector and government economists.

After two years in which President Obama and Republicans in Congress have fought to a draw over their clashing approaches to job creation and budget deficits, the consensus about the result is clear: Immediate deficit reduction is a drag on full economic recovery.

Hardly a day goes by when either government analysts or the macroeconomists and financial forecasters who advise investors and businesses do not report on the latest signs of economic growth – in housing, consumer spending, business investment. And then they add that things would be better but for the fiscal policy out of Washington.

This is not a lefty theory, being pushed by progressive ideologues. This is the consensus view, embraced by economists, the Federal Reserve, the IMF, and investment banks.

Our economic foes are generally those we elected to best serve our interests.

In some respects, policymakers should be applauded for their efficacy. They identified a goal, took steps to reach that goal, and succeeded. The problem, however, was the value of their ambitions – their goal was deficit reduction, not economic growth. As a consequence, the deficit really has shrunk remarkably quickly.

But policymakers chose the wrong priority. Indeed, they had a decision to make – grow the economy while making the deficit worse, or shrink the deficit while making the economy worse – and lawmakers regrettably picked the wrong one.

Yes, the economy is growing and the job landscape is improving, but the evidence is hard to ignore – we should see more jobs and a stronger recovery were it not for austerity measures holding us back.

Tax increases and especially spending cuts, these critics say, take money from an economy that still needs some stimulus now, and is getting it only through the expansionary monetary policy of the Federal Reserve.

“Fiscal tightening is hurting,” Ian Shepherdson, chief economist of Pantheon Macroeconomic Advisors, wrote to clients recently. The investment bank Jefferies wrote of “ongoing fiscal mismanagement” in its midyear report on Tuesday, and noted that while the recovery and expansion would be four years old next month, reduced government spending “has detracted from growth in five of past seven quarters.”

The Times’ report has a bipartisan veneer – Republicans spending cuts hurt the economy, but so too did Democratic tax hikes, ergo, blame both sides. But it’s worth taking a closer look.

For one thing, the bulk of the damage has been done by spending cuts, which reduced demand and took capital out of the economy at the wrong time. For another, the tax hikes we’re talking about here are not the new top marginal rate for the wealthy, but rather, the end of payroll tax breaks – and Republicans did not want to extend those breaks, either.

We’re dealing with self-inflicted wounds, but they’ve been inflicted almost entirely by one side of the partisan divide.

That’s the bad news. The good news is, the problem is incredibly easy to fix. Congress could, for example, turn off the sequestration cuts and remove the threat of default. It would take five minutes and immediately boost our economic prospects. Lawmakers could also invest in infrastructure and extend federal aid to prevent public-sector layoff at the state and local level, and we’d see unemployment at around 6.5% by the fall.

This won’t happen, of course, because congressional Republicans oppose public investments and want more of the policies that are undermining our economy.

It’s why we can’t have nice things.

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A familiar economic foe

Updated