Deficit reduction bigger challenge than job creation

opinions

February 2, 2010 - 12:00 AM

Faced with a politically forced slowdown in health reform, President Obama says he will concentrate on creating jobs and bringing down the deficit.
To which economists will say, make up your mind. More jobs or less federal spending? If there is any way to do both simultaneously the recipe is being held secret.
Most agree that the best way to create jobs quickly is to jolt the private sector into hiring with tax cuts and incentives. Well, not yet it hasn’t. Taxes have been cut for businesses, large and small, for the past two years. Unemployment remains at a shade over 10 percent. Employers aren’t hiring because consumers aren’t spending. Tax cuts won’t create jobs until a stronger market for the goods and services that workers produce develops.
This inconvenient truth hasn’t slowed the call for additional tax incentives from both sides of the aisle. President Obama’s new budget calls for still more business stimulation. The president also proposes more big spending on unemployment relief and other welfare enhancements to stimulate consumer spending.
Meanwhile, the economy took on a cheerier note. Gross national product jumped in the last quarter. Unemployment grew less. Some jobs are being created. Was that glimmer of light created by tax cuts or pump-priming spending? Some budding economist still to win his doctorate will write a book about it a decade from now and hint at the answer.
The president must continue to grope. He promises to increase spending by more than $100 billion in the coming fiscal year on tax cuts for workers and employers and other subsidies to increase consumption and encourage business expansion.
If those twin initiatives don’t work fast enough to suit those who keep their attention focused mostly on the November elections, the president can fall back on the federal solution: putting more people on government payrolls. Government jobs can be created by fiat. And they are good jobs with good pay, good benefits, good working conditions. They also represent “big government,” two words that give a very noisy part of the voting public conniption fits.
Both of these “solutions” have a job-killing downside: they increase the deficit. Cutting taxes cuts government income which pushes the deficit higher. Creating government jobs increases government spending, which pushes the deficit higher. Higher deficits threaten the stability of the American economy and could trigger a new slowdown as more and more money must be spent paying interest on the growing federal debt and is not available to sustain and grow the economy.
(A large chunk of those interest payments go to overseas creditors and, unlike much of other federal spending, do nothing to stimulate the U.S. economy.)
Economists say that federal deficits above 3 percent of the gross national product weaken an economy and are not sustainable in the long-term. The current deficit is nearly four times that much. President Obama wants to bring the budget closer to balance and wants a commission created to lay out a plan to achieve that goal. He apparently doesn’t believe it can be done without going outside the partisan political framework.

NOTHING DRAMATIC is likely to happen on the economic scene this year — unless change is driven by market forces rather than government action. Both parties will go for tax reductions. Some money may flow to the states to help them build and maintain highways, keep Medicaid afloat and support welfare programs while saving jobs that might otherwise be slashed. But don’t expect any big government job-creating programs or serious deficit reduction with the 2010 elections breathing down the administration’s neck.
And don’t expect Republicans to help the president create an independent deficit-tackling commission, either. They are far more likely to toss the proposal back onto his desk with a note attached: “Do it yourself. Here’s where the buck stops.”

— Emerson Lynn, jr.

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