Why Washington Won't Fix the Economy

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

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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.

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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

Presented by

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

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