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:
- On April 18, there was the warning by Standard & Poor's about our future credit-rating.
- Moody's expressed similar concerns on June 2.
- 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.
So, what do we do next?
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.