Why Washington Won't Fix the Economy

More

What's holding back the economy, what the federal government could do about it, and why it isn't

590 obama flag.png

High gas prices, weak job creation, and slacking global demand have put the U.S. economy on the brink of its second summertime setback in the last two years.  The economy added only 54,000 jobs last month, less than a third of the "breakeven" pace, sending unemployment above 9 percent.

As the economy re-re-deteriorates, it's lost Washington's attention. All the talk in D.C. is about the next few years. The Federal Reserve's quantitative easing program is about to expire, and analysts expect interest rates will only rise from here. Congress has focused on the debt ceiling and the ten-year debt burden to the total exclusion of unemployment legislation. Instead, Republican and moderate Democrats are negotiating how much to cut from the 2011 budget, no matter how many jobs perish with the cash.

What's holding back the economy and why can't we -- or won't we -- fix it?

What's Wrong With the Economy

The country faces internal and external challenges. Internally, we're under the cloud of a financial recession, which is different from all other recessions. In the early 1980s, steep job losses stemmed from high interest rates, which the Federal Reserve used to smoke out inflation. When rates went down (and taxes went down), unemployment went down with it.

In 2010, the evaporation of trillions of dollars of wealth between families and businesses meant that a battery of stimulus -- low taxes, zero-bound rates and a trillion-dollars in spending -- weren't enough to replace the money and confidence we lost in the housing boom. We're still living with that overhang and uncertainty.

The recession's most visible legacy is the unemployment rate, which has stubbornly clung around 9 percent range for two years. This creates a chicken-egg dilemma for employers. High unemployment and high debt means a weak consumer, which means bad business, which means slow hiring, which reinforces high unemployment and debt. Second, home prices are still falling and existing home sales gave flatlined. It would take four years for today's market to absorb our 4 million foreclosed homes. Third, as the stimulus peters out, 46 states have cut into vital programs. Fourth, economists claim that regulatory uncertainty from new health care and financial regulation laws have made employers pause large investment or hiring. Here's a graph from my colleague Dan Indiviglio summing up the latest numbers.

april.png

Even as the economy works to mend itself, it's getting blowback from overseas. High global demand for oil, combined with a supply shock in the turbulent Middle East, pushed gas prices to $4 this spring. Meanwhile the European Union is stumbling in its late teen years, and sovereign debt crises are rolling through Greece, Portugal, Spain, and Ireland. Finally, slower growth in China and other developing countries could reduce foreign demand for U.S. goods, which might explain our weakening manufacturing numbers.

What We Could Do

Washington has done a lot, but it hasn't been enough. TARP stabilized the banks, but financial stability didn't trickle down. The $800 billion stimulus repaired state budgets, but only for a few years. The Federal Reserve's two quantitative easy plans have made borrowing a cinch, but credit is still tight for small businesses. The December tax deal fattened our wallets, but higher gas prices made them thin again.

Even as most attention has turned to tomorrow's debt crisis, there's no law saying the the U.S. can't act on today's job crisis. The White House could make a stronger push for an infrastructure bank, more state bailout, or new creative ways to spend (or not collect) government money, like a tax rebate pegged to higher gas prices. The Treasury Department could technically write down mortgages held by Fannie Mae and Freddie Mac, which are backed by the federal government.* To keep the pressure on interest rates, the Federal Reserve could continue to buy assets off banks' balance sheets to pour more liquid in the financial system.

Why We're Not Doing Anything

Congress and the Federal Reserve aren't taking seriously the idea of more stimulus, but for different reasons. In Congress, politics has shrunk the world of the possible to the size of a nutshell. Specifically, a nutshell with the letters D-E-F-I-C-I-T scrawled on it. The perceived failure of the 2009 stimulus and ongoing economic weakness turned over Congress to Republicans and their "cut-big-cut-now" political message. That has drawn Democrats, once the party of stimulus, into a debate between cutting big and cutting bigger. There is no more appetite in Washington for more spending.

Between stimulus and deficit reduction, there is a clear middle way. Do nothing now. Freeze everything.

The Federal Reserve is holding off another round of stimulus for one simple reason: inflation. Food, gas and other commodity prices are skyrocketing around the world and the U.S. economy has grown now for seven consecutive quarters. Officials worry that another turn of the monetary spigot could add inflation to our growing list of problems.

What's Possible

Between stimulus and deficit reduction -- and between more monetary stimulus and tighter monetary policy -- there is a clear middle way. Do nothing. Freeze everything.

What would a do-nothing plan for the economy look like? For Congress, that would mean raising the debt ceiling with a clean vote and using the rest of the year to work on a deficit deal for 2012, not 2011. For the Federal Reserve, that would mean maintaining its balance sheet and reaffirming a "long term" target for low interest rates. This might not be the best case scenario for Summer 2012's post-re-rebounding economy. But then again, sometimes doing nothing is better than every reasonable alternative.
____________

*The downside of this plan, besides its ginormous price tag, is it would cost another trillion dollars and only help homeowners, doing little for struggling Americans who don't own a home.


Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

A Technicolor Time-Lapse of Alaska's Northern Lights

The beauty of aurora borealis, as seen from America's last frontier


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

A Time-Lapse of Alaska's Northern Lights

The beauty of aurora borealis, as seen from America's last frontier

Video

What Do You Wish You Learned in College?

Ivy League academics reveal their undergrad regrets

Video

Famous Movies, Reimagined

From Apocalypse Now to The Lord of the Rings, this clever video puts a new spin on Hollywood's greatest hits.

Video

What Is a City?

Cities are like nothing else on Earth.

Video

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Writers

Up
Down

More in Business

Just In