"A Mission Not Yet Accomplished"

David Leonhardt, economics reporter at the New York Times, reflects on the implications of weak recovery, market "optimism" and Congressional deficit-mania conspiring to slow growth of new jobs - and makes two modest, pragmatic suggestions that would be "no-brainers" in a saner political environment not rife with demagogues, ideologues and a GOP leadership whose admitted top priority is weakening the President for 2012:

"Work wanted!"

It’s obviously been a good week for the Obama administration. But it comes at a dangerous time, for both the administration and the economy. The excitement over tracking down Osama bin Laden could end up making the president and his advisers less panicked over the state of the economy. And they should be a little panicked.

For the second straight year, the recovery seems to be at risk of stalling. The economy grew at an annual rate of only 1.8 percent last quarter — eerily similar to the 1.7 percent growth last spring, just when job growth started slowing down...

White House advisers and Ben Bernanke, the Federal Reserve chairman, argue that the bad news is a merely a blip caused by bad weather, a temporary cut in military purchases and other one-time factors. They may be right, too. Stock market investors certainly share their optimism: the Standard & Poor’s 500 index is near a post-recession high.

But both Wall Street and Washington were also optimistic around this time last year — too optimistic. The unfortunate truth is that the recoveries from financial crises have a habit of disappointing.

Crises do so much damage that they leave businesses and households predisposed to believe the worst and to pull back at the first hint of economic weakness. Households are slow to resume spending. Banks are slow to lend, especially to small businesses. Companies are slow to hire.

All this is why the typical financial crisis has caused unemployment to rise for almost five years, according to historical work by the economists Carmen Reinhart and Kenneth Rogoff. We are well ahead of that timetable, thanks to aggressive action by the Fed, the Obama administration and, in its final months, the Bush administration. But our working assumption should be that this recovery will remain at risk for a long time.

If it stalls out for a second year in a row, the consequences could be particularly bad. The specter of a “lost decade,” like Japan’s, would become commonplace. Pessimism would feed yet more hesitation from businesses and households…
I suspect that Mr. Obama’s advisers have remained publicly optimistic over the last few months because they consider optimism to be one of the few economic tools they have left. The sensible step for Congress would be to pair long-term deficit reduction with a mix of short-term tax cuts and aid to states, whose budget cuts are leading to layoffs. But Congress hasn’t shown itself capable of separating the short term and long term. So the odds of new legislation to help the economy anytime soon are roughly nil.

Even so, there are still two steps the White House can take, and now is the time to start planning them. If policy makers wait to take action until the recovery has undeniably stalled — as they did last year — they will have waited too long.

The first step is to remember the economy’s vulnerability when negotiating a deal over the debt ceiling. Congress and the administration have until August to increase the federal government’s authority to borrow money, and Republican leaders say they will insist on spending cuts as part of any agreement.

There are still plenty of sensible cuts for the two parties to make. Tax breaks (which many economists consider a form of spending) for both businesses and individuals can be reduced. Military spending, which has risen more than 70 percent in inflation-adjusted terms over the past decade, can be cut, too. Many social programs, meanwhile, don’t focus enough on outcomes and waste money in the process.

But it would be folly to start making these cuts immediately and potentially put people out of work...

The second step involves the only way in which I can imagine Congress taking action to help the economy.

At the end of this year, about $225 billion of temporary tax cuts and emergency jobless benefits are scheduled to expire... at the end of 2011…

Their economic impact is not small. Moody’s Analytics estimated that the economy would have 1.1 million more jobs at the end of 2012 if the tax cuts and jobless benefits were extended. Yet their impact on the long-term debt is minimal…

The big lesson of financial crises is that too much optimism exacts a steep cost. You can make a case that the long hunt for Osama bin Laden offers the same lesson. A tough job is not done until it is undeniably done.