James Kennedy contributed to this post.
Less than three years ago, the U.S. financial system barely averted a catastrophic meltdown, and the nation was embroiled in a severe recession. Our economy was analogous to a car rolling backwards down a hill at an uncomfortably quick pace. Thankfully, America’s leaders were able to hit the brakes and stop the skid with policies that, while far from ideal, returned the economy to a forward gear. Job numbers stopped their freefall, with unemployment falling off of a high of 10.2% in October 2009 to 8.8% in March of this year. Modest growth reappeared, as GDP grew at nearly 3% in 2010, and corporate earnings quickly bounced back from 2008’s five year low. We appeared to be on the road to recovery.
Recent signs, however, have been disheartening. Now struggling to chug back up that hill, the economy appears to be sputtering – its fuel tank nearly empty, and without enough momentum to reach the level ground that represents sustained economic growth. The latest employment numbers paint a grim picture, and consumer spending remains depressed. Even with corporate profits at new highs, investors have kept their pocketbooks closed due to lack of demand in the economy. Moreover, the housing market stubbornly refuses to emerge from its slump. Last December’s “tax cut compromise” surely helped, but many of the policies had only modest stimulative effects. This year, elevated gas prices and the contractionary policies being pursued by state and local governments have offset most, if not all, of the deal’s positive effects.
We also know that looming over this latest dose of bad news is the nation’s unsustainable fiscal trajectory. Our public debt is already equivalent to approximately 70% of our annual economic output, and that figure is projected to rise rapidly in the coming years unless we enact significant debt reduction.
How convenient would it be if there was a straightforward and bipartisan way to deal with both our lackluster recovery and our longer-term debt burden in one shot? Actually, that plan already exists: Restoring America’s Future, the report issued last November by our Debt Reduction Task Force, contains just such a blueprint.
Led by budget guru – she has too many titles to list here – Dr. Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici (R-NM), the Task Force recognized that the United States needs to create jobs and assist the recovery while simultaneously enacting comprehensive legislation to reduce deficits in the coming years. Tinkering around the edges on either aspect will not be enough.
Specifically, the Task Force recommended a full payroll tax holiday for both employees and employers. Effective for an entire year, the holiday will put 6.2 % of every working American’s salary back in his or her pocket. Perhaps even more importantly, every employer will be able to hire new employees at a discount, and small business owners who are self-employed will receive a full 12.4% tax cut for the year.
An additional payroll tax break (on top of the small one from last year’s tax cut deal) recently has been proposed by members of both parties.
We cannot, however, afford this type of action in isolation. It must be paired with a comprehensive debt reduction plan that fundamentally reforms Medicare and Medicaid, ensures the solvency of Social Security, overhauls our arcane tax code, and restrains other government spending.
Unfortunately, many continue to frame the two objectives as mutually exclusive when they are, in fact, reinforcing. Pushing the economic pedal to the metal on a new tank of gas (with the payroll tax holiday), and also repairing our engine by guaranteeing future fiscal responsibility will get the economy back up to speed. A payroll tax holiday will hasten the recovery and help get Americans back to work, while returning our federal budget to a sustainable path will reassure both American and foreign investors. This is how we will replace our downward spiral of stagnation and ever-increasing debt with a healthy cycle of growth and confidence.
Both elected leaders and the political sphere seem to have made the media-ballyhooed “pivot” from economic recovery to deficit reduction. The truth is that no pivot is required. The two are not mutually exclusive. In fact, job creation and economic growth are necessary elements of deficit reduction.
That is precisely why Congress and the Administration should be taking a second look at the strategy pursued by the Domenici-Rivlin Task Force. The mutually reinforcing acts of “spur the economy now, guaranteed debt reduction later” produce the ideal formula. Acting on this basis may be the only way for the U.S. to avoid the sound of screeching brakes before our vehicle starts sliding back down that hill.
Read David Leonhardt’s “Cutting the Deficit, Adding Jobs” in The New York Times.