What can Washington do to boost the U.S. economy?

News Analysis

(MoneyWatch) As we enter the new year, the nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low. At the present rate of job growth, we are still several years away from full employment.

Monetary and fiscal policymakers could accelerate the return to full employment through tax cuts, increases in government spending -- particularly in areas that tend to create lots of jobs -- and further monetary easing. However, the ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government.

• Fed minutes show concern over bond buying
• Obama and inflation: Will Bernanke weaken the dollar?
• Fed minutes show many members favor more stimulus

Fiscal policy: More austerity could harm recovery

The ideal fiscal policy would combine tax cuts and spending increases to speed the recovery, with a credible commitment to debt reduction in the longer run. That would help with both our unemployment and long-run debt problems. But political differences and worries about the debt stand in the way of using tax cuts or spending increases to promote recovery. In fact, Congress has already committed to the opposite -- austerity through tax increases and spending cuts that will work against the recovery. Any further attempts to reduce the debt should be delayed until the economy is on better footing.

The long-run debt problem needs to be addressed, but the really large increase in the debt that has everyone so worried won't occur for many years. Meanwhile, as the experience in Europe has demonstrated, too much austerity too soon is counterproductive.

Delaying deficit reduction as much as possible and avoiding economically disruptive fights in Congress over the budget gap and debt ceiling will minimize the damage to the recovery.

Monetary policy: Stay the course

Monetary policy has been far from perfect. It has been too slow to react to the sluggish recovery, and many analysts argue that the Federal Reserve has not been aggressive enough when it has reacted. But the Fed has certainly been more aggressive and more responsive to the slow recovery than fiscal policymakers, and it has been able to implement additional policy measures despite the worries about the potential for inflation from some members of the Fed's monetary policy committee.

The Fed has already done quite a bit to stimulate the economy, and unless there is a large, unexpected downturn in the economy the central bank is very unlikely to do more to speed the recovery over and above the policies it already has in place.

The important question regards when the Fed will begin reversing its present policy by ending its asset purchase programs -- in other words, ending quantitative easing -- or by increasing the target interest rate. Up until the last  meeting of the Federal Open Market Committee, there was considerable uncertainty over when the Fed would begin reversing course, and there were worries that inflation fears would cause the Fed to stifle the recovery by reversing course too soon. But the Fed's recent announcement that it intends to keep interest rates low until unemployment falls below 6.5 percent or inflation is projected to increase more than a half a percent above target eased those worries considerably.

Best we can hope for

Many economists believe that both monetary and fiscal policymakers should do even more to help the economy recover. But practically that's not going to happen unless economic conditions change dramatically and unexpectedly for the worse. The best we can hope for is that fiscal policymakers do not begin serious deficit reduction too soon, that political standoffs over the deficit do not become economically disruptive, and that monetary policymakers do not increase interest rates or end quantitative easing until the economy is on firmer ground.

And that is the good news -- this is not a big worry for monetary policymakers. They are unlikely to make this mistake now that they've committed to the thresholds for unemployment and inflation discussed above. But with Congress engaged in another blood feud over the debt ceiling and spending cuts, fiscal policymakers are another story.

[TheDocD]

What can they do? Drone strike the Republican leadership.

[sjc_1]

Pass President Obama's Jobs Proposal that the Republicans rejected 18 months ago. Economists said it would have created TWO million jobs by now.

[maiingan]

I've said it before and I'll say it again: Boost the long-term unemployed, and all the underemployed Americans, and the economy will take care of itself. Here's how: http://www.change.org/petitions/demand-workforce-guided-job-creation