The Congressional Budget Office’s semi-annual update on the budget and economic outlook, out on Wednesday, offers sobering news about the next few years. The report’s economic analysis begins by observing that “[t]he slow pace of the current recovery is broadly consistent with international experience of recoveries following financial crises.” The authors cite key impediments to renewed growth—the burden of household debt, the need for financial institutions to restore their capital bases, lack of business confidence, and the glut of vacant homes left over from the construction bubble. Then comes the punch line: Unemployment will barely decline between now and the end of 2011, and is likely to stand at 8.5 percent in the fourth quarter of 2012.
Even with more vigorous growth beginning in 2013, we won’t return to full employment (about 5 percent) until the end of 2016. At various points, the authors stress that these unemployment projections are based on the economic outlook as it stood in early July and do not take into account negative events since then. If anything, labor market conditions could turn out to be even tougher than yesterday’s report suggests.
Against this gloomy backdrop, it’s good to hear that President Obama plans to give a major speech on economic growth and job creation soon after Labor Day. While we can’t rule out the possibility that the congressional super-committee may roll some of his proposals into an overall deficit reduction package, it seems more likely that the president will be setting the stage for a general election argument about the best way forward for the beleaguered U.S. economy. It’s all the more important, then, for him to embed his proposals in a credible narrative about the sources of our current predicament and the overall strategy for escaping it. (For purposes of concision, I’ve framed most of what follows in first-person prose, as though the president were speaking directly.)
On the diagnostic front, Obama should stress the following themes:
1. In recent decades we’ve become addicted to consumption at the expense of production. But we can’t indefinitely consume more than we produce. The vast American consumer market has sustained growth in foreign countries, but now it’s time to focus on the investments and innovations needed to make those countries into markets for what we make.
2. In addition, we became infatuated with financial manipulation at the expense of the real economy. Not only did a rising share of profits go to the financial sector, but also many of our most talented young people were diverted from other careers in the productive sectors of the economy. We focused too much on financial innovations, some of which severely damaged our economy, and not enough on innovations in products and services.
3. Homeownership is central to the American dream. But we should see our homes as what they are—places to live and raise our families, not as ever-rising assets that we can use to finance consumption and replace savings. During the past decade, too much capital and debt flooded into the housing market, and prices rose to unsustainable heights. The inevitable crash was devastating.
4. Because growth in wages and household income slowed dramatically, many families resorted to excessive debt to maintain their standard of living. Between 1980 and 2007, the debt burden on average households in relation to their income more than doubled. This line of credit couldn’t go on forever, and when it stopped, millions of families were left exposed.
5. Let’s face it: For decades, income and wealth in the United States have become more unequal. For some people, this is a moral issue; for others, even mentioning it smacks of “class warfare.” But the key point is that it has become a drag on our economy. As far-sighted corporate leaders saw as early as the 1920s, if working families couldn’t afford to buy what businesses were selling, the engine of economic growth would grind to a halt. By the end of that decade, it did. The same is true today.
6. And yes, we lost control of the federal budget. We can argue forever about why that happened. But what matters is fixing the problem so that we can restore confidence at home and abroad.
When it comes to what should be done, Obama should say we need to attack the problem on every front and do everything we can to reorient our economy toward economic growth and job creation. While the economy was once in the emergency room, today it is barely out of the ICU, and recovery is much too slow. Here are the key proposals he could offer:
1. Budget deficits this year and next are much less important than what happens over the next decade. We need a balanced, binding, and enforceable plan to stabilize our debt as a share of the economy within the next ten years, not the next two. I’m sending such a plan to the congressional super-committee today. It draws from the Simpson-Bowles Commission, other bipartisan groups, and leaders of both political parties.
2. We need pro-savings, pro-investment, pro-growth tax reform. It’s time to close the loopholes that drive up tax rates and push capital in unproductive directions. We need to cut the subsidies that promote debt over savings. And it’s usually the case that if you tax something, you get less of it. That’s why we should extend the payroll tax cut that’s already in place. In the long run, we should replace some of the tax on labor with revenues that don’t reduce incentives to hire new workers.
3. I meant what I said in my State of the Union address: To win the future, we need to make smart, targeted investments in those areas where the market won’t—in education, basic research, and infrastructure. And to do that, we’ll have to reduce spending in areas less directly related to growth and innovation.
4. We need to break down barriers to new business formation—the key to innovation and job creation. My administration has reviewed, and endorses, the comprehensive agenda developed by the Kauffman Foundation, which is doing the best work anywhere on entrepreneurship. And we’re going to work with the congressional leadership to write its recommendations into law.
5. We can’t grow as fast as we need to unless we can sell much more to other nations. Last year I set a goal of doubling our exports by the middle of the decade. We’re on track to do that, but we can’t reach our goal unless we complete action on trade treaties that have been stalled much too long. And we have to get serious with countries that use unfair regulation and currency manipulation to keep our goods and services out.
6. Finally, we have a choice: Either we wait three or four years for households to reduce their debt burdens and regain their balance, or government and business can find a way of working together to accelerate the process, which would boost growth. I want to speed things up. But we can’t do that as long as so many families are coping with mortgages they can’t afford. Let’s face it: A lot of big financial institutions made unwise decisions, and so did a lot of households. A lot of wealth that existed only on paper has disappeared and won’t come back anytime soon—and maybe not ever. Many of you think that these people and firms deserve to live with the consequences of their bad decisions. The problem is, the whole country is paying for their mistakes with slow growth and high unemployment. So let’s get lenders and debtors together with government to work out a better way of sharing the burden. We’ll all win if we do.
This is an ambitious agenda, Obama should conclude: But you didn’t send me or anyone else to Washington to meet big problems with puny solutions. Some pundits are talking about today’s conditions as the “new normal,” others are predicting a lost decade. We don’t have to accept this diminished future. But we won’t fix the economy until we change course. As long as I’m your president, I’ll focus on doing just that.