What the Economy Needs Is Growth (But Washington Isn't Talking About It)
If there’s anything frustrating about American politics at this moment, it’s the disappearance of mass unemployment as an area of elite concern. Now that joblessness is on the decline, Washington has moved away from efforts to further address the problem, despite the fact that unemployment isn’t expected to reach pre-recession levels for another four years.
You can say the same for Washington’s attitude towards growth. Gross domestic product increased by 3.1 percent in the third quarter of 2012, up from 1.3 percent in the second quarter, and 1.9 percent in the first. Average GDP for the year will probably fall near 2 percent.
Compared to the rest of the world, this is a solid recovery. But compared to what we need to close our output gap and begin to return to normalcy, it’s far from adequate. Despite this, neither Congress nor the White House seem interested in finding ways to generate more growth. Instead, both are preoccupied with austerity, with Republicans pressing for large entitlement cuts—having pocketed more than a $1 trillion in discretionary spending cuts—and Obama working to craft a “grand bargain” for long-term deficit reduction.
Deficits are not a problem for the United States right now. But even if they were, the current search for “balance” is short-sighted. As Annie Lowrey points out for The New York Times, higher growth—and lower unemployment—would vastly simplify our quest for a sustainable budget:
A ballpark estimate suggests that if the economy were to grow one percentage point more than expected in each year over the next 10, the deficit would shrink by more than $3 trillion. That would be more than enough to set the ratio of our debt to our annual economic output on a comforting downward trajectory. Moreover, it would happen without making cuts to a single program, like Medicare or food stamps, or without raising a single dollar of additional tax revenue.
And you don’t have to have such a large boost to growth to see dividends. An extra tenth of a percentage point every year for the next ten years would reduce the long-term deficit by hundreds of billions of dollars. Washington’s deficit hawks aren’t unaware of this—Lowrey notes that most plan debt reduction plans include a boost of short-term stimulus—but it isn’t a place of emphasis. People like Alan Simpson and organizations like “Fix the Debt” have little to say about our best path to fiscal sanity—more growth and lower unemployment.
All of this is to say that what’s missing from much of the conversation is an awareness that the deficit is a symptom of our broader economic problems—high unemployment and sluggish growth. In an ideal world, Congress would be open to hundreds of billions in new stimulus, since this is what the economy needs to shrink the gap between what we can produce, and what we’re producing. As it stands, stimulus is politically unfeasible. But what we could do is sideline deficit reduction as a priority for the federal government. That way, at least, we could avoid jeopardizing the recovery we have.
But with Republicans pushing the debt ceiling as a way to force further spending cuts, even that seems unlikely. Add to that the budget sequester, and you have a situation where the United States is almost certain to see more sluggish growth his year, as a result of this austerity.
And of course, sluggish growth (and a stagnant labor market) translates to further budget difficulties, which only increase the pressure for more cuts and greater cuts to the services people need.
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