The U.S. economy resembles a patient who survived a heart attack, and tells his doctor: "I took your advice, swallowed the pills and I still don't feel well."
We were warned that the post-recession recovery, now marking its second anniversary, would be painfully slow. It's worse than predicted. And it's hardly reassuring for Federal Reserve Chairman Ben Bernanke to concede: "We don't have a precise read on why this slower pace of growth is persisting."
Although U.S. unemployment is at 9.1% and forecast to remain above 8% through next year, the Fed says it won't do more to help the economy. The adrenalin of fiscal stimulus is wearing off. And Washington is fixated on deficits and debt ceilings. Is there really nothing to be done to help the economy heal?
One set of physicians, the Keynesians, are sure their medicine worked, but the dosage was insufficient. They prescribe more stimulus, perhaps renewing the payroll-tax holiday that is to expire at year end.
Another set, influential among Republicans, is just as sure the medicine didn't work. They prescribe the opposite: Starve the fever--cut spending significantly and soon.
A third set, influenced by professors Kenneth Rogoff and Carmen Reinhart's history of financial crises, says deleveraging is like detox: Painful, takes time and can't be rushed.
To be clear: Like a middle-aged man who needs to exercise, quit smoking and eat fewer French fries, the U.S. government needs to enact now a credible, long-term plan to reduce future budget deficits. Period. But that doesn't mean deficit reduction alone will unleash a surge of growth and hiring.
Remember: The worse the economy, the bigger the deficit. One-percentage-point slower economic growth in 2011 (even if the economy rebounds in 2012) adds nearly $100 billion to the 10-year deficit estimate.
References to "political reality" and reminders that "it could have been worse" aren't policy. If the president and Congress want to slip some growth-inducing remedies into the pending deficit deal, what should they examine with an unjaundiced eye?
--Housing. Home prices have fallen longer and farther than anticipated. A glut of empty or foreclosed homes continues to depress prices, making all American homeowners poorer and refinancing impossible for underwater borrowers.
At the president's insistence, his staff has examined nearly every untried option, and rejected them all. It's time for a rethink, in light of the persistently sour housing market. Perhaps state-owned enterprises Fannie Mae (FNMA) and Freddie Mae (FMCC) should be deployed to refinance credit-worthy underwater borrowers. Perhaps the federal government should buy foreclosed homes from banks and give them to local governments to fix up and rent.
--Hiring. The cycle is clear: Consumers won't spend more because so many are out of work or worried about losing their jobs. But employers won't hire more at home because they are uncertain demand will be there. Tax breaks to give consumers spending money is one approach, but maybe it's time for another: Nudge employers to hire with a tax credit for every worker they add or every extra dollar they spend on payrolls. Yes, it will reward some employers who would have hired otherwise. But 4.4 million Americans have been unemployed for more than a year, their prospects for ever going back to work diminishing. Watchful waiting is costly and cruel.
--Confidence. The only sustainable way to get the economy moving is for business to invest and hire more. Business spending on computers and equipment is up, but S&P 500 companies still have nearly $1 trillion of idle cash. Shoring up business confidence is the cheapest form of stimulus. Moving from rhetoric on exports to passing free-trade pacts would be a plus. So would a bipartisan deal on deficits. And so would appointing and confirming regulators for a growing list of vacancies. Suing Boeing Co. (BA) over where it puts its plants doesn't help.
But just because something will make executives feel better doesn't mean it's a good idea. Declaring a tax holiday for repatriating foreign earnings will boost spirits, but isn't likely to add many jobs or much investment, based on academic scrutiny of the 2004 tax holiday. One fact: Of the nearly $1 trillion in cash on S&P 500 companies' books, about 60% is already in the U.S., according to S&P and a new survey by the Association for Financial Professionals. Big business isn't short of cash.
--Infrastructure. The initial Obama stimulus was flawed in design and poorly explained. Shovel-ready projects weren't so shovel-ready, as the president has noted. But the federal government can borrow at below 3%, construction workers are idle, and many U.S. roads, subways and airports seem Third World-like compared with China's new ones. How about a quick round of government-funded infrastructure maintenance, putting some unemployed to work today on chores we'll have to do someday anyhow?
When times are tough, resignation isn't usually the American way. Why should it be now?
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