Congress puts the cart before the horse on economic recovery
by Richard Schiming
The author teaches economics at Minnesota State University, Mankato. He holds a Ph.D in economics from The Ohio State University and has expertise in the fields of money and banking, macroeconomics and economic education.
Our economy is currently suffering from two problems: a sluggish recovery from the Great Recession and a growing national debt.
Unfortunately there is no one fiscal policy medicine that can cure both of these problems at the same time. If you want to grow the economy and create jobs, fiscal policy needs to be expansionary: bigger federal budget deficits, more government spending, and lower taxes. However, this combination would increase the size of the national debt.
If you want to reduce the deficit and deal with the national debt, this medicine will require a mix of cuts in federal spending and tax increases. Unfortunately, this menu of policies would slow down economic growth and hurt job creation.
Fiscal policy is facing this tough choice right now.
The president has proposed more fiscal stimulus focused on job creation. At the same time, there is a congressional super committee whose goal of reducing budget deficits will require a fiscal policy with higher taxes and less government spending down the road. The default position triggered by the failure of this super committee would require over $1 trillion of spending cuts over 10 years.
How to deal with this policy dilemma?
Imagine yourself an emergency room physician. A patient comes in with acute difficulty in breathing. In the course of your examination, you also discover that the patient also has a slow growing cancer that, if left untreated, will eventually be fatal. What should you do? In the emergency room, the answer is always triage, treating the most immediate problem first.
How should this principle apply to our hurting economy?
Clearly, the weakness in the labor market is the most pressing and critical problem for our economy. Our economy cannot really have a complete recovery unless the job market improves. Our growing national debt is the lingering problem that, if left untreated in the long run, could eventually kill the economy.
Following the principle of triage, our policy makers should first tackle the labor market problems with an aggressive jobs bill. Once they decide that this is the first problem to cure, they need to use the most effective fiscal medicine, increased government spending on our infrastructure. That medicine gets into the economy’s bloodstream with the most speed and strength.
Later, once the economy’s immediate crisis has passed and we are breathing more easily, they can begin working on treating our long run deficit problem.
Paradoxically, the long run cure is already being addressed. Spending cuts and tax increases proposed by the super committee or spending cuts mandated by the failure of the super committee will start in 2013. This one-year delay is long enough to give the economy some breathing room to recover.
But so far, Congress has not addressed our most pressing problem of job creation. We are doing our triage backwards, ignoring the most severe problem of unemployment while dealing with the less immediately threatening malady of deficits.
Ignoring our labor market woes while concentrating on the long run deficit problem first runs the risk that the recovery might well die while we are waiting for the long run cure.
The author teaches economics at Minnesota State University, Mankato. He holds a Ph.D in economics from The Ohio State University and has expertise in the fields of money and banking, macroeconomics and economic education.
Our economy is currently suffering from two problems: a sluggish recovery from the Great Recession and a growing national debt.
Unfortunately there is no one fiscal policy medicine that can cure both of these problems at the same time. If you want to grow the economy and create jobs, fiscal policy needs to be expansionary: bigger federal budget deficits, more government spending, and lower taxes. However, this combination would increase the size of the national debt.
If you want to reduce the deficit and deal with the national debt, this medicine will require a mix of cuts in federal spending and tax increases. Unfortunately, this menu of policies would slow down economic growth and hurt job creation.
Fiscal policy is facing this tough choice right now.
The president has proposed more fiscal stimulus focused on job creation. At the same time, there is a congressional super committee whose goal of reducing budget deficits will require a fiscal policy with higher taxes and less government spending down the road. The default position triggered by the failure of this super committee would require over $1 trillion of spending cuts over 10 years.
How to deal with this policy dilemma?
Imagine yourself an emergency room physician. A patient comes in with acute difficulty in breathing. In the course of your examination, you also discover that the patient also has a slow growing cancer that, if left untreated, will eventually be fatal. What should you do? In the emergency room, the answer is always triage, treating the most immediate problem first.
How should this principle apply to our hurting economy?
Clearly, the weakness in the labor market is the most pressing and critical problem for our economy. Our economy cannot really have a complete recovery unless the job market improves. Our growing national debt is the lingering problem that, if left untreated in the long run, could eventually kill the economy.
Following the principle of triage, our policy makers should first tackle the labor market problems with an aggressive jobs bill. Once they decide that this is the first problem to cure, they need to use the most effective fiscal medicine, increased government spending on our infrastructure. That medicine gets into the economy’s bloodstream with the most speed and strength.
Later, once the economy’s immediate crisis has passed and we are breathing more easily, they can begin working on treating our long run deficit problem.
Paradoxically, the long run cure is already being addressed. Spending cuts and tax increases proposed by the super committee or spending cuts mandated by the failure of the super committee will start in 2013. This one-year delay is long enough to give the economy some breathing room to recover.
But so far, Congress has not addressed our most pressing problem of job creation. We are doing our triage backwards, ignoring the most severe problem of unemployment while dealing with the less immediately threatening malady of deficits.
Ignoring our labor market woes while concentrating on the long run deficit problem first runs the risk that the recovery might well die while we are waiting for the long run cure.
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1 Comments:
Question - did the good professor write an article on spending less when we were running a surplus?
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