It’s all about the jobs

By Laura Tyson
August 4, 2011

By Laura Tyson
The opinions expressed are her own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Tyson’s reply. Here are responses from Benn Steil, Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as well.

I share many of Professor Summers’ reactions to the debt limit deal — the so-called “Budget Control Act of 2011.” Like him, I am deeply relieved that the deal averted a default and its destabilizing effects on global financial markets and the global economy. Yet, also like him, I am cynical that the deal will lead to significant deficit reduction.

The deal claims to contain about $900 billion in spending cuts over the next decade. But the fanfare of the Tea Party notwithstanding, the deal does little more than confirm the low spending levels already negotiated for 2011 and 2012 and establish a cap for 2013 spending. Almost half of the $900 billion comes from cuts in security spending, primarily cuts in defense spending consistent with the anticipated reduction in US engagement in Iraq and Afghanistan.

The deal also calls for an additional $1.5 trillion in deficit reduction over the next decade to be determined by a special congressional committee and to be sent to Congress for an up or down vote with no changes allowed. The committee will be evenly divided between Democrats and Republicans selected by leaders of Congress and is charged with developing a deficit reduction package by Thanksgiving. Congress can reject the committee’s package but that would trigger automatic cuts of $1.2 trillion, about half of which would come from defense.

Given the unprecedented partisan divide and rancor in Congress, it is highly unlikely that the committee will be able to agree on a deficit reduction package or that such a package would win Congressional approval. It is even more unlikely that the trigger mechanism, which would require additional savage cuts in defense spending, would ever be allowed to take effect. Trigger mechanisms have been tried before and have a poor track record. In the past Congress has used ingenious loopholes and budgetary tricks to get around them. Moreover, as Professor Summers observes, the Congress that comes into power after the 2012 election can simply decide to reformulate the debt deal and drop the trigger mechanism and its automatic cuts altogether. This is by far the most likely outcome.

Super congressional committees and automatic triggers are undemocratic mechanisms for making tough budgetary choices. We need a balanced multi-year deficit reduction package that includes both revenue increases and spending cuts and that contains credible mechanisms for slowing the growth of health care spending. The deficit-reduction plans embodied in the debt deal fail to satisfy these conditions.

I also share Professor Summers’ anxiety about the US economy. Like him, I believe that the immediate problem facing the economy is jobs, not the deficit. Growth in the first half of the year was less than 1 percent, and the odds that the economy will slip back into recession have increased sharply over the last few months. The official unemployment rate currently stands at 9.2% and a growth rate of more than 2.5% is necessary to keep it from rising further.

The jobs gap and faltering recovery warrant additional temporary fiscal measures to increase private demand and promote job creation. I believe that the government should extend some of the targeted tax measures enacted at the end of 2011, including the payroll tax cut for employees and the capital investment expense deduction. It should go further and cut payroll taxes for employers on all new hires including hires by new businesses, and these payroll tax cuts should stay in effect until the unemployment rate falls below 6%. In addition, the government should invest more in infrastructure maintenance and expansion. Infrastructure investment raises demand, creates jobs and increases the growth potential of the economy. I am not optimistic that any of these measures will be enacted.

Professor Summers argues that the debt deal does no immediate harm to the economy. He may be right. But the means by which the deal was achieved has done significant harm to our global reputation and to our politics. The Tea Party Republicans have succeeded in shifting the political debate from the jobs crisis to the size of government. And they have used irresponsible threats and tactics to win a legislative and ideological victory. Given their success, they are likely to try to use the same tactics in the future, reducing the odds that we will get the economic policies we need to address our immediate jobs gap or our long-term deficit.

18 comments

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[...] deal. We will be publishing the responses here. Below is Tyson’s reply. Here are responses from Laura Tyson, Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as [...]

“The jobs gap and faltering recovery warrant additional temporary fiscal measures to increase private demand and promote job creation.”

Demand isn’t the problem. The real problem is that production of virtually every product that we consume has been given away to foreign countries through bone-headed trade policy, beginning with the signing of the Global Agreement on Tariffs and Trade in 1947, driven by a blind, unquestioning embrace of early-1800s trade theory. By 1976 our trade surplus was erased and our cumulative trade deficit since then is approaching $11 trillion.

Any economic remedies that don’t begin with fixing our trade policy to restore a balance of trade in manufactured products are a farce.

Posted by Pete_Murphy | Report as abusive

[...] deal. We will be publishing the responses here. Below is Steil’s reply. Here are responses from Laura Tyson, Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as [...]

Do you ever wonder if the stories they play on the news are true and they have camps that teach extreme conservatives to go out there and comment a lot? I bet they even give them talking points.

Posted by jakowie | Report as abusive

Whether or not one sees foreign trade agreements or fiscal responsibility at home as paramount to correcting a faltering economy, nothing substantive will emerge from Washington until as HosedInAmerica stated “outlaw lobbyists and their bribes”. A shell company just gave Mitt Romney one million dollars and then dissolved. All our political offices are for sale.

The Congress has passed more illegal legislation(Federal Reserve Act, War Powers Act, Patriot Act, Homeland Security Act….) that the President signed into law giving twelve people the power to decide how much debt we can incur. Essentially, members of Congress agreed that they couldn’t agree and passed their responsibility off to some one else. This has been a recurring problem with our Congress for a Century now.

What ever form of government we now have, it is no longer Democratic or Republican. We are beginning to look more and more like a Fascist State of the 1930s in Europe. And our military and political advisors think that the Iraqi’s and Afghans aren’t ready to govern themselves?

Posted by coyotle | Report as abusive

Tax outsourcing & lower corporate tax for small business.

Posted by robb1 | Report as abusive

Why not a jobs guarantee? Outside the Beltway, the country is in WPA/CCC mode. Why not get the biggest bang for the buck on aggregate demand, instead of putzing around with tax cuts?

Posted by lambertstrether | Report as abusive

“I believe that the government should extend some of the targeted tax measures enacted at the end of 2011, including the payroll tax cut for employees and the capital investment expense deduction.” Yeah it was like a dream – Employers are having hard time finding qualified applicants and salary has increased 15% over last year. Only catch, though, is that it happens in China. Are you suggesting we stay this course? Can’t believe why our leaders behave like two-year-olds – Why are we so obsessed with bubbles? What’s the plan after the latest pops?

Posted by Whatsgoingon | Report as abusive

Whether it’s the “Donkeys or Elephants” (or both) deciding on what’s best for saving our nation, NEITHER party WILL!!! Why? Because neither gives a damn about our nation’s sovereign “well-being”!!! The only thing they care about is “POWER” and “re-election!”.

It’s about time that “ALL OF US” (the voters) send a very clear message to our “so-called LEADERS”: “Come to a consensus NOW!” or else our once “Great Nation” will fade into history!

Posted by Middleclassman | Report as abusive

Many comments these days suggest that we have to replace (all/most of) already chosen LEADERS. Unfortunately, we do not have real options to do it, beside hypothetical ‘revolution’ what is out of question having in mind existing division between american people. Others believe that some rational moves they propose can make future better for most of Americans. Our LEADERS are aware of all these options, be sure in it, but is not in their interest to initiate any of these rationales. They are not in connection with people and have very different interests in mind. So here we are.

Posted by Pred | Report as abusive

Tell it to the Repos!

Posted by borisjimbo | Report as abusive

I was under the impresion that the WTO was a fair system. Somehow only the North Americans have to pay up the world prices. Slap some kind of tarrifs on these cheap Chinese imports. Competition is good, but when the Chineese work for $80 dollars a month there is no competition. When I buy I look for the made in USA or Canada sticker and I am seeing less and less of those.
So Mr.WTO what you gona do?

Posted by piro | Report as abusive

Dump Obama. Hillary in 2012!

Posted by rhess595 | Report as abusive

how do you ‘create’ jobs?

every business in the world is shedding human labor, in favor of automated productivity gains……..even outsourcing will become obsolete.

eventually, every employee that gets replaced, loses income and purchasing power.

that person is a customer, that no longer spends money…..

that effect causes businesses to fail or become more competitive

it’s a snake eating it’s own tail, Ouroboros

Posted by Robertla | Report as abusive

The jobs are permanantly gone. We in corporate America have spent the last 10 years shipping every possible job overseas. When is the Fed and the White House going to realize that. Printing money just allows us to invest in more overseas operations.

Posted by minipaws | Report as abusive

RE: Printing money and investing overseas.

Maybe investors are more important to the government…….first priority, despite all the hoopla about ‘debts, jobs’.

then, they need to find customers overseas as well

we’ve been sold out

Posted by Robertla | Report as abusive

Oh Jeez, people, these companies can’t hire more employees. That would cut into the upper level management’s salaries and benefits.

Posted by lhathaway | Report as abusive

If its all about jobs, and it is, then behind the jobs is education. No solid education and no trained employees. I’m for as many people getting a college education THAT WANT ONE! However, there’s one kind of career area that can’t be off-shored–craft labor like, electricians, plumbers, auto body work, mechanics, a/c and heating installation and maintenance, etc. “Blue Collar” labor is not a low class job as many propagandists say. I’ve heard “Educrats” talk down “Blue Collar” work as if it’s something like leprosy. My eldest son is a commercial plumber. Earns a good salary. The company that supplied my pellet stove has employees that earn good salaries and benefits. Jobs, Yes, but Education Yes.

Posted by neahkahnie | Report as abusive

It is all about the exchange value of the dollar.

Cut the value of the dollar by half again and imports will be snuffed out because no one will buy them. And real domestic production (that is, goods made from American component by American citizens) will start up again. If the people actually have jobs, the deficit will shrink unless we blow it invading someone else.

Posted by txgadfly | Report as abusive

Now, we have the S&P (bankers) working with the Republicans / Tea Party in trying to insure that President Obama “fails.” Their misguided and evil partisanship is also making our Country “fail” and has it headed back into a serious recession.

Republican/Tea Party stooges = anti-middle class American.

Posted by Andrew43 | Report as abusive