What Can Washington Do to Fix the Economy?

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The economy has hit a bump. Does the government have any tools it can use?

If the weakness we've been seeing since April from various economic indicators hasn't been enough, last Friday we learned that the U.S. only added a measly 54,000 jobs in May. This number is disturbingly low at a time when an economic recovery should be providing at least five times that many net new hires. This morning, my colleague Derek Thompson explained why the government won't fix the economy. Let's take that question a step further: should the government act and how might it be able to do so?

Should the Government Act?

The way you answer this question probably depends in large part on how cynical you are about the government's ability to do anything right. Up to now, it doesn't have the greatest track record. The $787 billion stimulus package from early 2009 produced far weaker results than hoped (see chart below, click to enlarge). Extending the Bush tax cuts at the end of 2010 hasn't seemed to strengthen the economy much either. Both Republican and Democratic strategies have failed to help sustain an enduring recovery.

white house unem updated 2011-05 v2.PNGThere could be a few reasons for this. Partisan politics tends to get in the way. Perhaps if Democrats had focused on a stimulus package that provided more shovel-ready, direct job creation efforts -- instead of serving as a wishlist for their allies -- then it may have had a greater impact. And perhaps if Republicans had structured the tax cuts to better aim at lower- and middle-class Americans, then they would have put more cash in the pockets of the consumers who are currently feeling pinched by high gas prices.

Or perhaps even with these changes, nothing would be different. The unemployment problem  is mostly demand driven. Americans aren't rushing to buy lots of additional goods and services, so firms aren't hiring more workers. Since Washington doesn't have a mind control machine, it can't make people spend money. It might just take time for the economy to heal.

What the Government Might Be Able To Do

Unfortunately, we're impatient. Indeed, those millions of Americans who have been unemployed for a year or more have good reason to be impatient. But the political reality is such that additional government spending or tax cuts will be difficult: Washington is in the midst of a deficit-cutting strategy session. As a result, any proposals that intend to create jobs must be considered in the context of that debate. This might sound impossible, but it isn't.

A Grand Unified Debt Ceiling Compromise

The debt ceiling situation is tricky. It has to be raised, but the market will also probably look for it to include some plan for long-term deficit reduction. If any job creation measures are to be taken, they should be a part of this discussion.

For example, let's say you want to stop state and local government jobs from bleeding. Last month they shed 30,000 government jobs. Even though the government can't force the private sector to hire new workers, it can work to prevent state and local governments from firing its current workers. (See note below for how such a program might work.) Another option might be to temporarily suspend all gas taxes to reduce the price at the pump.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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