The Obama administration is now out of ammunition: neither monetary nor fiscal policy options are available to stimulate economic growth, reduce unemployment, and encourage consumer spending.
Since December 2008, the Federal Reserve's overnight federal funds rate (the interest rate the Fed charges banks for short-term loans) has been at 0.25 percent. With modest inflation, that interest rate becomes negative. The Fed is paying banks to borrow, and yet borrowing is minimal. Banks are still not lending, and consumer spending has not rebounded to anywhere near pre-Great Recession levels.
Likewise, fiscal policy is tapped out, constrained by as yet unresolved partisan, ideological wrangling over spending, revenue, and the conditions for raising the nation's debt ceiling. The economic stimulus of over $1 trillion (including the Bush tax cut extension and the payroll tax holiday), followed by two rounds of quantitative easing by the Fed (essentially the Fed buying U.S. Treasury securities), also failed to turn around the economy. These actions may have averted financial Armageddon, but they have not generated sustained economic growth sufficient to absorb new entrants to the U.S. labor force, let alone reduce the net backlog of the nearly 7 million jobs lost during the Great Recession.
Several short-term incentives have also failed to revive aggregate consumer demand. In fact, they may have been counterproductive. The tax credit for first-time home buyers created a one-time spike in home sales that lasted only a few months. With housing prices continuing to slide, those first-time buyers who used the credit may have seen their new homes' values subsequently decline, thereby making them worse off financially.
Earlier this year, President Obama established a new Council on Jobs and Competitiveness chaired by GE CEO Jeff Immelt. The Council is doing good work, and hopefully, its deliberations and ultimate recommendations will help stimulate greater economic growth and employment. Its preliminary report, issued on June 13, included approaches such as visa reform, expanded tourism, more small-business loans, better worker training, and encouraging more construction and infrastructure projects. Later this year we can expect recommendations on tax and regulatory policy from the Council. In the meantime, the Council's work has been greeted with little enthusiasm. Neither President Obama nor his Jobs Council can lecture the economy back to health. Concrete actions are needed now.
This is a perilous moment for our country and for our economy. Job creation is sluggish, and unemployment remains stubbornly high at 9.1 percent. The housing market is still unsettled. Moreover we are beginning to see clear, unmistakable evidence of a gathering storm:
An adviser to the Chinese Central Bank in June warned us sternly that even a brief U.S. default would be "playing with fire." And finally, the cost of buying credit default swaps on Treasury debt -- those esoteric instruments used most commonly to insure against corporate bond defaults -- recently has been at its highest level since late-March. Concern over Eurozone cohesiveness, sovereign debt, and the ongoing role of the Euro may be masking the future inflation potential associated with our annual $1.4 trillion budget deficit and a $14.3 trillion national debt, now set to grow even higher.
Companies are making their investment and human-capital decisions for 2012 right now. Many of these decisions will be locked in before the August 2nd debt-ceiling deadline. Given the current economic climate and the uncertain fiscal environment between now and early August, companies will most likely make conservative decisions that will limit job creation and capital investments.
Economics is, fundamentally, about the psychology of expectations, and the most important issue affecting the psychology of expectations today is the continuing slide in American home prices. Until home prices stabilize, the U.S. economy will continue to be weak, and consumer spending will be moribund.
Here are five concrete steps that the President, Congress, and the Federal Reserve can take now to change the current climate:
- The Federal Reserve should gradually -- very gradually -- begin to raise interest rates as a way to signal the end of our era of cheap money. A modest increase in interest rates will reverse current consumer expectations of an ever-falling cost of housing, and thus will help stabilize home prices.
We need immediate incentives to invest in America. Temporarily more generous depreciation rules, available only until the economy begins to recover, would incent corporations to take advantage now, while the economy is weak. Reduce the corporate tax rate now, financed by closing tax loopholes. Announce a regulatory moratorium on all but essential regulations until economic growth exceeds 3 percent for three consecutive quarters and the unemployment figure reaches 7.5 percent, whichever comes first. The George H.W. Bush Administration enacted such a moratorium in January 1992 as a further stimulus to a weak, uncertain economy. Recreate the 1990 Andrews Air Force Base budget negotiations. Congressional and Administration leaders should meet in private, away from the media, until they agree upon the necessary structural reforms to the U.S. budget -- including entitlement reform (Medicare, Medicaid, and Social Security), defense spending, budget-process reforms, revenue reforms, and the schedule for phasing in any spending cuts and revenue increases. As part of this process, the Congress and the Administration should commit to structural tax reform that lowers rates, broadens the base, eliminates major loopholes, and cuts so-called tax expenditures. An agreement in principle should be reached before August 2nd, with legislative details provided before the end of this year.President Obama travels the country giving pep talks at various factories in an effort to highlight companies that are doing well and hiring. Many business leaders, however, find his language both uninspiring and uninformed when it comes to the incentives that are really needed to alter the current trajectory of the American economy. Our markets, our businesses, and our citizens deserve concrete action -- not lip service -- sooner, not later.
Charles Kolb is president of the nonpartisan, business-led Committee for Economic Development in Washington, D.C. He served in the George H.W. Bush White House as Deputy Assistant to the President for Domestic Policy. The above views are solely the author's.
Our 2024 Coverage Needs You
It's Another Trump-Biden Showdown — And We Need Your Help
The Future Of Democracy Is At Stake
Our 2024 Coverage Needs You
Your Loyalty Means The World To Us
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
The 2024 election is heating up, and women's rights, health care, voting rights, and the very future of democracy are all at stake. Donald Trump will face Joe Biden in the most consequential vote of our time. And HuffPost will be there, covering every twist and turn. America's future hangs in the balance. Would you consider contributing to support our journalism and keep it free for all during this critical season?
HuffPost believes news should be accessible to everyone, regardless of their ability to pay for it. We rely on readers like you to help fund our work. Any contribution you can make — even as little as $2 — goes directly toward supporting the impactful journalism that we will continue to produce this year. Thank you for being part of our story.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
It's official: Donald Trump will face Joe Biden this fall in the presidential election. As we face the most consequential presidential election of our time, HuffPost is committed to bringing you up-to-date, accurate news about the 2024 race. While other outlets have retreated behind paywalls, you can trust our news will stay free.
But we can't do it without your help. Reader funding is one of the key ways we support our newsroom. Would you consider making a donation to help fund our news during this critical time? Your contributions are vital to supporting a free press.
Contribute as little as $2 to keep our journalism free and accessible to all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. Would you consider becoming a regular HuffPost contributor?
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. If circumstances have changed since you last contributed, we hope you'll consider contributing to HuffPost once more.
Support HuffPostAlready contributed? Log in to hide these messages.