Friday’s disappointing jobs report highlights an important point about the state of the U.S. recovery: It’s not so strong that the country’s politicians couldn’t kill it off.
Almost three years after it hit bottom in mid-2009, the economy has recently been showing signs of entering a virtuous cycle in which rising employment, consumer spending and business activity reinforce one another. Even with March’s relatively meager 120,000-job increase in nonfarm payrolls, the three-month average gain comes to about 212,000. That’s more than enough to make a dent in the unemployment rate, which fell to 8.2 percent in March from 8.3 percent in February.
If the strengthening trend persists, the U.S., which accounts for about a fifth of the planet’s economic activity, could become an engine of growth just in time to help offset a slowing in the rest of the world. Economists expect the euro area to suffer a recession this year as austerity measures bite. China’s government has lowered its growth target as it seeks to engineer a soft landing.
Still, as the latest employment report demonstrates, the U.S. isn’t out of the woods. We’ve seen false dawns before, and the recovery remains weak. The job growth in March fell far short of expectations, and a decline in the number of people looking for work drove the drop in the unemployment rate. Forecasters surveyed by Bloomberg News expect the economy to grow at an inflation-adjusted rate of just 2.2 percent this year and 2.4 percent in 2013, below what most consider to be its long-term potential. Payroll employment, at about 133 million, remains about 5 million short of its peak in December 2007.
More important, the economy faces some daunting man-made obstacles. Under current law, the expiration of Bush-era tax cuts at the end of this year will add about $4 trillion to Americans’ tax bills over 10 years. An additional $1.2 trillion in automatic spending cuts could take effect as a result of last year’s debt-ceiling deal. At the same time, stimulus measures such as payroll-tax breaks and extended unemployment benefits are scheduled to end.
Much larger tax increases and spending cuts will eventually be needed to get the U.S. government’s long-term finances under control. But with the economy already operating well below capacity, and with the Federal Reserve’s ammunition running low, the risks of making such moves now are skewed heavily to the downside. A renewed slump could permanently stunt the economy’s growth as despondent businesses failed to invest in the future and the long-term unemployed dropped out of the labor force permanently.
By contrast, putting off the cuts — or even engaging in more short-term fiscal stimulus — could be a great investment. Costs are extremely low: Markets are willing to lend the U.S. government money for 10 years at an interest rate of only 2.2 percent. Meanwhile, the danger of falling into a spiral of self-perpetuating high unemployment makes the benefit of any added job creation particularly large. In a recent paper, economists J. Bradford DeLong of the University of California at Berkeley and Lawrence Summers of Harvard University estimated that in these unusual times, a temporary boost in government spending would actually reduce the U.S. debt burden, because the added tax revenue would outweigh the increase in debt-service costs.
We recognize that a new round of stimulus is a political nonstarter in this election year. At the very least, though, President Barack Obama and Congress should refrain from doing exactly the opposite of what is advisable. If they can muster the responsibility to make a deal before the end of the year that extends the Bush tax breaks in return for a postponement of spending cuts, they would greatly increase the recovery’s chances of survival.
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