Most Wall Street analysts read the disappointing May numbers as a
sign of a temporary rough patch in the recovery, albeit a particularly
nasty one. "Overall, this is horrible," Ian Shepherdson, chief U.S.
economist for High Frequency Economics, wrote Friday morning, "and if we
thought it would continue for much more than another month or two we
would be seriously worried. But we think it is largely a reaction - an
overreaction we would say - to the rise in oil prices, and a very real
hit to autos and tech from the Japan earthquake."
Still, it is clear markets and job creators are losing confidence
fast, and a serious agreement from Washington would go a long way to set
them at ease.
It's not hard to find credible outlines of what such an agreement
would look like. In one form or another, the best ideas combine an
immediate jolt for growth with concrete steps to tame the nation's most
troublesome medium- and long-run economic ill: budget deficits that are
projected to balloon past 100 percent of gross domestic product.
One possibility would be to link a long-run deficit-reduction plan,
perhaps modeled on the Simpson-Bowles commission's proposal that heavily
curbs entitlement spending, with several hundred billion dollars in
immediate infrastructure spending - building roads, modernizing the
electric power grid, shoring up crumbling bridges. Both sides of that
ledger have drawn bipartisan support in the past, and Congressional
Budget Office director Douglas Elmendorf has advocated a similar plan
Jared Bernstein, an economist who just left the White House for the
Center on Budget and Policy Priorities, floated a related idea in an
email this morning. He suggested it was time to seriously consider the
plan from another bipartisan deficit commission, Dominici-Rivlin. That
idea would suspend employer and employee payroll taxes for a year - an
estimated $650 billion boost to spending power - in concert with
long-term entitlement reform and other deficit reduction.
"It's of significant magnitude, the first name of the commission that
proposed it is 'bipartisan,' it cuts labor costs to employers and
boosts paychecks of workers, who will spend the money, generating useful
second round effects," Bernstein said.
A more conservative version of the idea, favored by American
Enterprise Institute Economist Kevin Hassett, would pair an immediate
cut in corporate tax rates with broader deficit reduction.
"Rather than fix our nation's problems, Obama has focused on near
term adrenaline shots," Hassett wrote in an email. "The adrenaline is
wearing off, and our fiscal policies are still broken. .. We don't need
something temporary, targeted and timely, we need something broad and
permanent and timely."
Most importantly, we need something. The soft patch may be
short-lived, especially with gas prices headed down for three weeks in a
row, but the fundamental problems in the economy persist. The long-term
outlook is too debt-laden. The short-term recovery still needs
strength. Now would be a great time for lawmakers to show some strength
of their own, and address both.