Claims That America Needs Not More Stimulus, But Fiscal and Monetary Retrenchment
Rebutted by Laura Tyson:
The US economy has just marked two years of recovery from its worst recession since the Great Depression. But few Americans are celebrating; indeed, most believe that the economy is still in recession. No wonder.... The employment decline during the 2008 recession was more than twice as large as those of previous postwar recessions.... More than 2m discouraged workers will have stopped looking for work. The fraction of the population working is near a 25-year low. According to calculations by the Hamilton Project, the US will face a “jobs gap” of about 21m jobs.... The jobless recovery is also a wageless recovery for most Americans. Corporate profits have soared, claiming an unprecedented share – more than 80 per cent – of the growth in national income since the recovery began. But real average weekly earnings for production and non-supervisory workers have increased by less than 1 per cent since the recovery started. Real median weekly earnings have fallen. Real median household income in 2009 was 4 per cent lower than its pre-recession high and about the same as it was in 1997....
It is not surprising that many Americans are pessimistic about their economic future. Nor is it surprising that they think jobs should be the top priority for policymakers. They are right. Unfortunately, many members of Congress are not listening. Urged on by Tea Party Republicans interested more in the size of government than the size of the government’s debt, the debate in Washington is focused on deficit reduction rather than on job creation. It is true that the US faces a major fiscal challenge that must be addressed. But this is a long-run challenge... primarily the result of rising healthcare costs, the ageing of the population and unwise [Republican and Bush] fiscal choices.... The short-run challenge is inadequate demand – a gap between the amount of goods and services the economy can produce and the demand for them, caused mainly by the private-sector deleveraging. The long-run challenge calls for fiscal contraction. The short-run challenge calls for fiscal support.
There is a logical way out of this policy conundrum: pair temporary fiscal measures targeted at job creation during the next few years with a multiyear, multitrillion-dollar deficit reduction plan that would begin to take effect once the economy is closer to full employment. Pass both now as a package. Current signals from Washington indicate that this way out will be not taken: instead, partisanship and politics will trump logic and premature fiscal contraction will undermine the already anaemic recovery. Even worse, a political stalemate over the debt limit could precipitate a financial crisis...
