In the wake of Barack Obama's historic and decisive victory in 2008, we were reminded that a crisis was a "terrible thing to waste." But recognizing an opportunity—and seizing it—are two different things.
Clearly the new Administration had a big agenda and enormous challenges. Faced with two wars, the worst economic conditions since the Great Depression, and record budget deficits, the tasks for the new President would be far more difficult than dispatching John McCain had been.
Although the economy was spiraling downward, a heavy legislative agenda was laid out on issues ranging from health care to financial reform, to the environment. The weak economy and loss of American jobs were not overlooked by President Obama. But in its first major legislative initiative, his Administration may have underestimated the severity, and the unique nature, of the economic downturn.
The American Recovery and Reinvestment Act of 2009—the $787 billion stimulus package adopted in February 2009—was classic Keynesian "pump-priming." Given the severity of the recession, it was, depending on your political persuasion, either insufficient stimulus or more "pork" than good policy. Whatever the conclusion, it is now clear that the stimulus package did not keep unemployment under 8 percent as Obama's economic team had predicted ahead of the bill's passage.
An Untypical Downturn
While a stimulus package of that magnitude would have spurred economic growth in any previous postâWorld War II downturn, we were not in a typical recession by any measure. Economic output and employment dropped rapidly following the near-collapse of the U.S. financial system. In retrospect, not even a stimulus package double that size could have sparked a recovery sufficient to create all the jobs necessary to employ the bulk of the American labor force that is now unemployed or underemployed.
Fast-forward 18 months. The "recovery summer" of 2010 touted by President Obama in June is almost over, and we are now approaching the November midterm elections, with many polls suggesting Republicans could regain control of the House and Senate amid voter discontent over the economy and job market.
Since the debate over just what should be done to goose the economy and employment will heat up as Election Day nears, there is no better time to consider what alternatives our political leaders have to address our economic woes. Before suggesting a few policy options, two observations should be readily apparent.
Setting Some Priorities
First, since the American consumer drives the U.S. economy, the most important lens through which monetary and fiscal policy should be viewed for the foreseeable future is the extent to which it is likely to produce real growth in gross domestic product—and create private sector jobs. If a legislative initiative destroys jobs or retards growth, whatever the substantive merits of the proposal, it must be put on hold until the economy fully recovers. That may take several years.
Second, given the depth of the economic and financial crisis and the actions taken over the past two years, the government and the Federal Reserve actually have rather limited options available to them to spur economic growth. Clearly they have the capacity to act if the economy deteriorates further, but the available traditional options—more deficit spending and further cuts in interest rates—may not be sufficient to deal with a protracted low growth/no growth economy.
Congress has one last opportunity to address the economic malaise before the voters have their say in November. Here, in no particular order, is a range of policy options that thoughtful members of both parties should consider:
Permit repatriation of overseas corporate profits: Although the U.S. has a worldwide system of taxation, the foreign-source income of U.S. corporations is not taxed by the U.S. until those profits are brought into the country. Since those profits have already been taxed by the country in which they were earned, most U.S. companies keep their non-U.S. earnings overseas to avoid double taxation. These funds remain offshore and are available to be used for capital expenditures and acquisitions outside the U.S. Permitting U.S. companies to bring these funds to the U.S. without further tax, whether they are ultimately used for increased dividends, share buybacks, capital expenditures, or domestic acquisitions in the U.S. will only help spur economic growth.
Increase the number of technical and professional visas: While it might seem odd to propose increasing the number of visas for non-U.S. workers at a time when the country is in the midst of high unemployment, need for highly skilled workers continues in many industries, and those workers are essential to economic growth. More than ever, we are in global competition for the best and most talented workers. If we do not make room for these individuals, they will go elsewhere, and the jobs will follow them.
Extend the Bush tax cuts: Raising taxes is counterproductive in any weak economy, but to increase taxes right now would stall any nascent recovery. Congress should extend the Bush tax cuts for a few years and use that time to develop a long-term approach to taxation that will increase economic growth while funding necessary government expenditures.
Tax credit for new jobs: Employers should receive additional tax credits for the creation of new jobs. A temporary federal tax credit would give businesses added incentive to create new jobs. These tax credits may be expensive, but the economic growth generated by the new workers who would be employed will eventually more than pay for any lost tax revenue.
Free-trade agreements: Free trade has served the U.S. economy well. While many are skeptical about accords such as Nafta, the U.S. economy relies on the flow of goods and services with trading partners around the world. One opportunity to show the world that the U.S. retains its commitment to global commerce: A pending free-trade agreement with Colombia. Signed in 2006, the agreement needs only to be ratified by the U.S. Senate. Given that economists expect economic growth rates in Latin America to exceed that of the U.S., arrangements with Colombia and other emerging markets will help to increase U.S. growth. Congress should consider ratifying the Colombian agreement without further delay.
As a keen observer of the Washington scene, I am not expecting any big breakthroughs ahead of the election. (That joint press conference with House Speaker Nancy Pelosi and Minority Leader John Boehner will probably have to wait.) What we can hope for is that our political leaders do the right thing to address the weak recovery and enfeebled job market, even if they do it only to avoid their own unemployment at the hands of an increasingly anxious electorate.