It’s all about the jobs
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.