With the recent slowing of an already fragile U.S. economic recovery, an increasing number of experts are becoming convinced that the economy needs help. Economists, columnists, and policymakers have joined a drumbeat stressing ideas that could strengthen the recovery, while warning against policies that risk pushing us back into recession.
What We Shouldn’t Do: Policymakers should adopt a balanced plan—one involving both spending cuts and revenues increases—to rein in medium- and long-term deficits. But with over 20 million people un- and underemployed, now is not the time to institute large budget cuts or tax hikes.
Aggressive spending cuts this year or next wouldn’t just hurt those most exposed to the tough economy. By taking money and services away from those who need them most, such cuts would hurt the macroeconomy as well. Independent research has consistently found that the benefits from safety net programs like unemployment insurance and food assistance and entitlements like Social Security go disproportionately to people who spend the money fairly quickly to meet basic needs. That, in turn, leads to more economic activity, amplifying the impact.
We should also avoid creating any additional economic “air pockets” in the short term. That is, as federal stimulus fades and states continue to face budget constraints, we mustn’t allow policies that are boosting demand to fade too soon, as explained below.
Another bad idea right now would be to allow multinational corporations to bring their overseas profits back to the United States at a sharply reduced tax rate. Instead of generating jobs, the evidence is that this type of tax holiday results in windfall profits for shareholders of a few large companies.
What We Should Do: Clearly, the politics of pivoting to job creation are very tough right now (though if the Mavericks can beat the Heat, anything’s possible!). But the realities of the tough economy may have created an opening. Thus, it makes sense to have a ready agenda of ideas that could help:
Beyond this, ideas have been floated to add to the current payroll tax cut for workers and extend it to employers as well, thus lowering the cost of hiring. Increasing the payroll tax cut for workers could be particularly important if energy prices remain high, as it has been instrumental in offsetting the negative impact of higher oil prices.
We will continue to stress more ideas like these in days to come. But the key point is that all the economic signals are pointing to the need to: a) pivot towards doing more to help the many working families still struggling with the tough job market; and b) pivot away from short-term spending cuts that will hurt those families more while threatening to further slow the fragile recovery.