The nation’s unemployment rate would probably be nearly a point lower,
After two years in which President Obama and Republicans in Congress have fought to a draw over their clashing approaches to job creation and budget deficits, the consensus about the result is clear: Immediate deficit reduction is a drag on full economic recovery.
Hardly a day goes by when either government analysts or the macroeconomists and financial forecasters who advise investors and businesses do not report on the latest signs of economic growth — in housing, consumer spending, business investment. And then they add that things would be better but for the fiscal policy out of Washington. Tax increases and especially spending cuts, these critics say, take money from an economy that still needs some stimulus now, and is getting it only through the expansionary monetary policy of the Federal Reserve.
“Fiscal tightening is hurting,” Ian Shepherdson, chief economist of Pantheon Macroeconomic Advisors, wrote to clients recently. The investment bank Jefferies wrote of “ongoing fiscal mismanagement” in its midyear report on Tuesday, and noted that while the recovery and expansion would be four years old next month, reduced government spending “has detracted from growth in five of past seven quarters.”
That period roughly coincides with the time that Mr. Obama and Congressional Republicans have shared governance since Republicans took control of the House in 2011, promising an immediate $100 billion in spending cuts. Republicans did not get that much then, but the series of budget compromises with the president since — while not so great as they wanted — will soon reduce annual discretionary spending for domestic and military programs to the lowest level in half a century.
As for revenues, Mr. Obama forced Republicans to acquiesce in January to higher taxes from wealthy Americans. But worse, in the macroeconomists’ view, both parties agreed not to extend a two-year-old cut in Americans’ payroll taxes for Social Security, reducing their spending money.
In all this time, the president has fought unsuccessfully to combine deficit reduction, including spending cuts and tax increases, with spending increases and targeted tax cuts for job-creation initiatives in areas like infrastructure, manufacturing, research and education. That is a formula closer to what the economists propose. But Republicans have insisted on spending cuts alone and smaller government as the key to economic growth.
The results, Mr. Obama has taken to saying, despite his complicity, are “self-inflicted wounds.”
“The only way the problem does get fixed is if both parties sit down and they say, ‘How are we going to make sure that we’re reducing our deficit sensibly?’ ” he said last week at a news conference. “How are we making sure that we’re investing in things like rebuilding our airports and our roads and our bridges, and investing in early childhood education, basic research — all the things that are going to help us grow?”
Mr. Obama added, “I cannot force Republicans to embrace those common-sense solutions.”
Speaker John A. Boehner stood by the Republicans’ policies during a session Tuesday with reporters. “After four years of mediocre job creation, it’s obvious that we don’t need more tax hikes and more government spending,” he said. “We need smarter policies to make America more competitive and expand opportunities for everyone in our country.”
“We’re the ones pushing this town to do the right thing when it comes to the economy and jobs,” Mr. Boehner added.
The Federal Open Market Committee, which sets policy for the central bank, noted signs of improvement in the private sector last week in a statement. “But fiscal policy is restraining economic growth,” it added, echoing public comments that Ben S. Bernanke, the Fed chairman, has made for months. In April, the International Monetary Fund said the United States would achieve further growth “in the face of a very strong, indeed overly strong, fiscal consolidation.”
... the United States initially opted for stimulus measures and allowed deficits to increase when the recession and financial crisis hit five years ago. European governments pursued austerity policies to cut their debts, further stalling economic activity and in turn inflating deficits.
The more recent austerity policies here are helping to bring annual deficits down, as a new report of the Congressional Budget Office shows, after four years of trillion-dollar shortfalls. Yet many analysts would prefer that the measures had been timed for when the economy is strong and unemployment below 7 percent.
“While I agree that the U.S. must get its fiscal house in order,” Jerry Webman, chief economist at OppenheimerFunds, wrote, “I join the likes of the I.M.F. in cautioning that too much austerity, too soon, is likely counterproductive.”