Although the debt ceiling imbroglio is finally behind us, hard times are ahead. Having avoided a potentially catastrophic default on the national debt, Washington has set the economy up for a painful few years, and without a major change of course, we can expect to see higher unemployment and slower growth in the near future.
In recent days we have seen a lot of talk about the group of 12 legislators who will be charged with coming up with at least $1.2 trillion in deficit reduction over the coming decade, as well as the automatic triggers that will ensue if Congress fails to heed the recommendations of this "super committee" when it reports in the fall. But the most important part of the debt ceiling bill that President Obama signed on Tuesday, Aug. 2 is its plan for $1 trillion in spending cuts over the next 10 years. While many of these cuts won't go into effect until after a new Congress is elected in 2012 (and, as such, might never come to pass), a significant portion are scheduled to take place within the next year and a half. This is a major problem, because austerity measures have the potential to throw the economy back into recession. As we learned during the Great Depression, cutting government spending in the midst of a downturn lowers aggregate demand and keeps businesses from expanding. This, in turn, depresses the economy and increases deficits in the long run.
If this were not enough, it appears that many of the proposed cuts will come from Medicaid and education aid to the states. Combined with the fact that the bill fails to extend unemployment insurance or provide other forms of assistance for the growing number of jobless Americans, the debt ceiling "solution" will harm the most vulnerable members of society. And who's to say we won't see similar stunts over the coming years? Watching Republicans use an obscure legislative procedure to extract radical policy concessions will likely lead to more economic hostage-taking in the future.
Unemployed Americans and our democratic system of government might not be the only victims of the debt ceiling debacle. Although the final bill was drastically skewed in Republicans' favor, President Obama is poised to take the lion's share of the blame. For better or worse, presidents are usually held responsible when the economy heads south, and with projections of high unemployment lasting through next year's election, the White House is going to have a tough time convincing the electorate that they deserve another four years.
Yet all is not lost. The silver lining to the debt ceiling resolution is that Washington can finally turn its attention to the major issue of the day: jobs. As Republicans in Congress continue to work themselves into a frenzy over spending cuts -- witness their ongoing efforts to shut down the Federal Aviation Administration -- President Obama and others interested in solving the nation's main economic problem can take a number of steps to get Americans back to work. Here are three:
1. Speed Up The Stimulus
Currently, a little over $100 billion from the 2009 stimulus bill has not been spent. Although many of these funds have been allocated to agencies and will be disbursed over the coming months, a good portion remains tied up by regulations. In California, for instance, over $300 million of stimulus funds for weatherizing homes and financing clean energy businesses have gone unspent because of federal regulatory delays. The lag time in getting projects off the ground has been one of the major drawbacks of the stimulus, and federal agencies should grant the states waivers to speed disbursement of funds before conservatives in Congress try to withdraw unspent money.
2. Loosen Monetary Policy
With spending on the chopping block, the government's main economic tool is monetary policy. The Federal Reserve has already taken a number of steps to increase the flow of money in the economy, but it could do more. As Fed Chairman Ben Bernanke stated in congressional testimony last month, by committing itself to keeping interest rates low and maintaining its large holdings of private assets ("quantitative easing") for a specific period of time, the Fed could make credit more available throughout the economy. Eliminating the interest rate that banks get for keeping their excess reserves at the Fed would also encourage more lending. And, while it might trigger inflation, the Fed could pump more money into the economy by undertaking another large round of Treasury bond purchases.
3. Move Money Around
In an age of austerity, the federal government must focus on getting the most bang for its buck. One way to do so would be to expand loan guarantee programs. As Bill Clinton recently argued, excess TARP reserves could be used to guarantee private loans for small businesses that have struggled to obtain credit since the financial crisis. Under such a scheme $15 billion of federal funding could lead to $150 billion in new loans.
Such measures will require the resourceful thinking and political courage that have gotten the country through previous hard times. To be sure, these qualities have been in short supply of late. But if the president wants to avoid joining his fellow Americans in the unemployment line, he needs to abandon his penchant for bipartisan compromise and work with those who are interested in improving the economy to find creative solutions to the jobs crisis.