Last Updated Nov 3, 2010 7:52 AM EDT
The battle for Congress is over, but the policy debates will continue: What, if anything, should the government do about the faltering economy?
Economic growth is still sluggish. Unemployment remains grim — despite unexpected signs of improvement last week — the housing slump drags on, and economists debate whether inflation or deflation will be our next financial nightmare. Little wonder the economy trumps every other concern for voters: 43 percent called it the top issue in a recent Gallup poll, nearly double the next biggest issue. Yet few candidates have explained what they would do to turn the economy around. Republicans promise to cut waste and taxes; Democrats tout the promise of the stimulus and health-care reform. Both sides vow fiscal responsibility. Only rarely does either side give voters much in the way of specifics.
Still, amid all the political posturing, a few promising ideas stand out. Below, we list five that target our economic ills from slightly different angles. You’ll find no cure-alls here (or anywhere else), and every one of them carries a price tag, sooner or later. Indeed, that’s one of the hallmarks of any serious economic fix — it generally requires lower spending, higher taxes, or both. For lawmakers and voters, the decision is which tradeoffs are worth making.
1.Extend Unemployment Benefits
The single surest way to get the economy going again is to get consumers spending. But as workers lose their jobs and homeowners watch the savings they poured into their houses evaporate, they have less money to spend and they save more. Those most likely to spend any money that comes their way? The unemployed. They need the cash for groceries, rent and gas — spending that then circulates in the economy. Nervous workers, meanwhile, are more likely to save any extra money that comes their way.
Unemployment checks aren’t as glamorous as new wind turbines or as resonant as fire-station refurbs, but extending benefits has been central to the federal government’s response to the economic slump. That includes the $787 billion stimulus bill passed in February 2009, which some Democratic candidates quietly took credit for — and for which many more were noisily blamed by their opponents.“Every dollar we spend in unemployment benefits, we get almost two dollars back return,” Senate Majority Leader Harry Reid, of Nevada, said during the debate over an extension bill this summer. “People are desperate for this money, and it will help our economy.”
To be sure, in a deficit economy, the money for benefits is borrowed, and will have to be paid back with interest. And some argue that unemployment benefits encourage people not to work. But most economists agree that unemployment benefits are helpful. In a study of economic-growth policies earlier this year, the Congressional Budget Office ranked unemployment extension as one of the most effective ways the government can boost the GDP. A separate study of a $33 billion unemployment extension proposal this summer estimated that the measure would generate $58 billion in economic activity. (After considerable debate, Congress passed an extension, which is scheduled to expire Nov. 30.)
Unfortunately, a few otherwise employable workers might watch TV all day instead of looking for work, but right now, with five people looking for a job for every opening, extending benefits is the right policy. Longer term, Congress should take itself out of the ad-hoc extension business, and craft a system that automatically extends benefits in bad times, and shortens them in good.
2.Cut Business Payroll Taxes
Republicans tend to prescribe tax cuts in good times and bad, while Democrats tend to resist them in both. But many tax cuts, like spending programs, have a mixed track-record when it comes to fighting economic malaise: Individuals often save rebate checks instead of spending them, and income-tax breaks can take a while to kick in. One proposal with promise is a payroll-tax holiday, raised by California GOP Senate candidate Carly Fiorina, among others. “We would provide very targeted tax holidays, a 5-year tax holiday for new businesses ... and a 10-year holiday for a business willing to relocate its facilities [to the U.S.] with an emphasis on manufacturing and hiring American workers,” Fiorina said as election day loomed.
The proposal in her Jobs for Americans plan, on her website, is a little different — a two-year payroll-tax holiday for small businesses and startups that hire unemployed workers. But the core idea is one that the CBO study ranked close behind unemployment insurance as an effective way to spur spending. That isn’t because it’s likely to spur hiring directly, but rather because the increase in profits is likely to boost stock prices and household wealth and encourage more consumer spending, or because it would let companies cut prices, improving sales and, in turn, production and hiring.
Although small businesses are widely credited as the engine of growth in this country, their hiring patterns are uneven and failure is common, which limits the benefits of giving them tax cuts. Fiorina’s proposal to target companies that hire unemployed workers, however, as opposed to poaching from a competitor, makes it more likely that taxpayer money funds truly new jobs. It’s also good for the rest of us: Studies suggest that those who are out of work for long periods can lose skills and lose hope, becoming chronically underemployed and a drag on the economy over time.
3. Fund Aid to the States
It turns out that truly “shovel-ready” projects aren’t always easy to unearth on short notice. The projects that can be funded quickly are often small, or take time to gear up. By contrast, with tax revenue decimated and most state constitutions requiring a balanced budget, laying off teachers and firefighters is the work of a moment.
But so is writing the check that keeps them employed. That was the reasoning behind a good chunk of the aid to the states in the much-maligned stimulus bill, and it’s not a bad plan: If you’re trying to shore up consumer spending, it doesn’t matter much whether you get a law firm to hire a paralegal or prevent a municipal accountant from losing her job— but preventing a layoff is faster. “The thing to do is not to cut teachers’ jobs,” says Justin Wolfers, an associate professor at the University of Pennsylvania’s Wharton School of Business and a visiting fellow at the Brookings Institution in Washington. “There’s every reason to think this has the same good effect that building a bridge has — this is income that goes to buying more groceries.”
Here, too, Congress could make everyone’s life easier by looking to the long run. If states get a hand in tough times, they should send money back to Uncle Sam in boom times, either by repaying loans or simply with the same kind of revenue-sharing that helps in a bust. It’s a great idea in theory, but don’t hold your breath, Wolfers says. “It seems hard to see the states actually tolerating that.”
4.Temporarily Extend the Bush Tax Cuts
There’s no shortage of candidates pushing to extend the Bush tax cuts, which were scheduled to vanish this year. Republicans generally want to extend them wholesale, while most Democrats are pushing to let them expire for the wealthiest Americans (typically individuals making more than $200,000 and families earning more than $250,000). Some have suggested a temporary extension — two years, say — on the theory that spending will suffer if anyone’s taxes go up. Plus, in a fine Washington tradition, it kicks the question comfortably down the road.
Economists generally agree that if consumers’ taxes rise in a recession, it could crimp spending — the opposite of what you’d want. At the same time these tax cuts are expensive: Extending all of them would likely double the budget deficit by 2020, all else being equal. Letting taxes rise for higher-income Americans pares 20 percent to 25 percent of that, the CBO estimated in September. So it’s a trade-off. The more of the tax breaks you extend, and the longer you extend them, the bigger the benefit to the economy in the short run — and the more expensive it is in the long run, ultimately slowing growth down the road.
So split the baby. The best idea is a compromise floated last month by former Obama budget director Peter Orszag: Extend the tax cuts, but for just a couple years. And instead of letting them sunset, which sets the stage for another round of brinksmanship, Congress should explicitly set out how they will be phased out, for whom and over how over how long. Then comes the hard part: Stick to it.
5. Raise the Social Security Age
The single most important quality in a sensible economic policy: It causes pain. That’s not a sadistic observation, only the reality that some combination of tax hikes and spending cuts will be necessary to bring the amount the government spends into line with the amount it collects in taxes. And putting people to work costs money, either now or later. Yet campaigns aren’t about speaking unpleasant truths to the American electorate. “Vague ideas come out of campaigns,” says Julian Zelizer, a Princeton University professor of history and public affairs. “They don’t tell you much about the next four to eight years, or two years in the case of Congress... Once people are in power they have to make all kinds of compromises.”
Yet some candidates are giving it a shot and getting specific about sacrifices to come. One is Marco Rubio, the Republican candidate for Senate in Florida’s three-way senatorial battle. On several occasions, the 39-year-old has raised the need to make changes to Social Security, perhaps by increasing the retirement age for today’s younger workers. “I do think that the retirement-age issue is going to have to be confronted at some point as a measure to reform Social Security,” he said early this year.
But as others have noted, cutting the deficit appreciably is all but impossible without raising taxes (anathema to Republicans, and many Democrats these days) and probably reducing spending on the military, Medicare and Social Security — all three of which are sacred cows to much of the critical, middle-of-the-road electorate. And to shrink the impact of Social Security on federal finances, something has to give. Raising the retirement age for those who are still years from retirement is one option. Another is to collect Social Security payroll taxes on income over the current cap of $106,800 a year. The most effective approach is probably a combination of those, perhaps with other changes as well, such as raising the payroll tax rate or taxing benefits for more higher-income retirees.
None of those would be popular, and all serious deficit-reduction plans will hit fierce opposition from one quarter or another. Nor does Congress have to go for what’s likely to work the best. Public disappointment in the 2009 stimulus bill has left even Democratic supporters skittish about trying an encore — so more aid to the states, politically, is probably a non-starter. With two years left in the Obama Administration, a Republican-controlled House could mean massive gridlock. Even in an agreeable environment, lawmakers often prefer recasting pet projects as economic fixes to making difficult decisions.
In the end, the default approach is one advocated by some conservative economists: Do nothing, since trying to soften the slump may just prolong it. “To some extent we have to let things unfold,” says Chester Spatt, an economist and finance professor at Carnegie Mellon’s Tepper School of Business. “Doing things to cushion it to some extent is just extending it out, and that’s not desirable.”
The government has plenty of choices between letting the free market crown winners and losers, or launching a full-bore second stimulus. It boils down to two fundamental options: Would you rather rip the Band-Aid off fast or slow?
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