This theory looks pretty good on paper, but it's not rooted in reality
If you ask an economist why we have such high unemployment, you're likely to hear a number of answers. Many will say that businesses aren't sensing strong enough demand by consumers to warrant additional hiring. Others will claim that regulatory uncertainty is preventing more aggressive expansion. Some will say the taxes are just too high. A few might point to structural problems in industries like construction or financial services. But could the problem be uncertainty about how the U.S. will close its deficit in the future?
This is a contention made in a Bloomberg op-ed by Glenn Hubbard, former Council of Economic Advisers Chair under President George W. Bush and current advisor to Mitt Romney. Much of the piece is quite good. He says that additional short-term stimulus won't help, if it's financed by raising taxes in the short-term. That's correct. He goes on to argue that any additional stimulus should include a plan to offsets that new spending in future years. That's also sensible.
But here's where he loses me:
This observation points out two problems with the case for stimulus being made by Obama. The first is that near-term and temporary support for household incomes does little to counterbalance the chilling effect of announced future policies. Uncertainty becomes the enemy.
This is particularly true for the president's proposal to reduce the employer portion of the payroll tax for small- business owners, while proposing to raise marginal tax rates on those same business owners. The president's advocacy for higher marginal tax rates on the well-to-do dampens both job creation and asset prices.
And, it is a collapse in job creation that lies at the core of the present unemployment problem. Uncertainty over future tax and spending policy -- How much will taxes need to rise to finance rising spending? If spending is to be cut, how and on whom? -- weighs heavily on household and business spending decisions.
The second paragraph above is correct -- ignore that one. But in the first and third me makes an unusual assertion: he's saying that a key factor holding back job growth is fear about how the government will finance its borrowing. This sounds good in theory, but it isn't rooted in reality.