A Mix of Austerity & Job Creation

peter orszag economic growthIn the debate between austerity and job creation, both sides are right (in a way).  With a weak labor market, a combination of a focus on jobs now and fiscal austerity later is needed to create a fiscal path that is sustainable for any significant amount of time.  Temporary job creation with delayed, permanent deficit reduction is a solid plan.  In an article for Bloomberg View, Peter Orszag correctly predicted a period of relatively slow growth, with unemployment declining similarly slowly.

While the outlook today is a little brighter than in the immediate years after the burst of the credit bubble, there is still concern over long-term joblessness. It’s still too early to tell what the effects have been of lasting weakness in the labor market. In Europe in the 80′s, a temporary downturn resulted in lasting unemployment, which takes a toll on the government in many ways, not least of which is the ongoing distribution of unemployment benefits.

In order to limit damage to the labor market from the fiscal drag of 2011, it was suggested that the government provide additional macroeconomic support by extending the existing payroll tax holiday. More than that, the idea was that Congress should link the payroll tax directly to the unemployment rate. In this way, the tax holiday would automatically adjust to real-world conditions. When unemployment is high and the economy is weak, support would be provided.

This maneuver wouldn’t work alone, however, as the long-term fiscal course at the time as unsustainable. Reducing the deficit immediately would have proved foolhardy, but it was suggested that measures be enacted right away to pave a path to lowering it over the next decades.

In the debate between those who support raising revenue and those who don’t, it’s important to remember the importance of timing. In the short-term, continued spending is likely to be necessary in order to regain some economic stability. On the other hand, raising revenue for the next thirty years isn’t likely to make 2050 a better year, considering the growing costs of running the government, most notably in healthcare.

2011 predictions saw the deficit hovering around 5 to 6% of GDP by 2015. In order to have a sustainable and stable fiscal trajectory, that percentage needs to be closer to 3%. Spending cuts wouldn’t give us more than a half a percentage point, so it’s clear that spending cuts alone wouldn’t be enough to stabilize the deficit. More revenue is needed. Allowing the 2001 & 2003 tax cuts to expire, while a difficult choice, would raise roughly the right amount of revenue to meet the 3% range.

In the short-term, more revenue will help to get us on track. In the long-term, we’ll need to look for ways to dramatically cut growing costs. With healthcare costs expected to increase from 5.5% of GDP to 12%, it makes sense to look there.

from Economist Peter Orszag http://ift.tt/1gTOIJo

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