President Barack Obama gave a small hint today about what, if anything, he plans to do about unacceptably high unemployment and slow economic growth over the next year. In a press event with German Chancellor Angela Merkel, Obama was asked about the economy. His answer is worth repeating in full (emphasis mine):
Q: Thank you, Mr. President. You both face economic troubles. Mr. President, how worried are you about the threat of a double-dip recession? What specific policies are you considering to help head it off? And abroad, do you expect Germany to fund another bailout for Greece?
And Chancellor Merkel, is Europe concerned about the possibility of the U.S. defaulting on its debt? Thank you.
PRESIDENT OBAMA: I’m not concerned about a double-dip recession. I am concerned about the fact that the recovery that we’re on is not producing jobs as quickly as I want it to happen.
Prior to this month we had seen three months of very robust job growth in the private sector. And so we were very encouraged by that. This month you still saw job growth in the private sector, but it had slowed down. We don’t yet know whether this is a one-month episode or a longer trend.
Obviously we’re experiencing some headwinds, gas prices probably being most prominent. It has an enormous impact on family budgets and on the psychology of consumers. And so we are taking a range of steps to make sure that we’ve got an energy policy that can bring some stability to world oil prices.
But the overall trend that we’ve seen over the last 15 months — 2 million — over 2 million jobs created over the past 15 months — a rebounding of the manufacturing sector in the United States that’s exemplified by the recovery of the Big Three automakers here — all indicates that we have set a path that will lead us to long-term economic growth.
But we’ve still got some enormous work to do. And as long as there are some folks out there who are unemployed, looking for work, then every morning when I wake up, I’m going to be thinking about how we can get them back to work.
Some of the steps that we took during the lame duck session, the payroll tax, the extension of unemployment insurance, the investment in — or the tax breaks for business investment in plants and equipment — all those things have helped. And one of the things that I’m going to be interested in exploring with the members of both parties in Congress is how do we continue some of these policies to make sure that we get this recovery up and running in a robust way.
We then have a set of long-term competitiveness challenges that aren’t so different from what Germany or any advanced country is having to go through in the 21st century, where we have emerging markets who are becoming more competitive themselves. And we’re going to have to step up our game.
So making sure that our school systems are working well and we’ve got the best-trained workers in the world; making sure that we’re investing in infrastructure so that we can attract businesses to our shores; making sure that we reform our tax system so it’s less complex, more transparent, and is encouraging of business investment; and getting a hold — getting a handle on our deficit in a way that’s balanced and sensible.
So we’re going to have some days where things aren’t going as well as we’d like. There are going to be some times where we’re surprised with better economic data than we expected. We are on the path of a recovery, but it’s got to accelerate. And that’s going to require a continuation of a lot of the steps that I’ve already discussed.
Obama mostly talks here about long-run budgeting priorities and the usual preoccupations of taxes and deficits that we’ve seen for some time. But there’s one new feature: Obama may ask for an extension of the tax-side stimulus measures in the 2010 deal which extended the Bush tax cuts. Many of those run out this year, including the three he specifies – the payroll tax cut, the extension of unemployment insurance, and the business tax breaks for investment. He’s going to ask to extend those again. Indeed, since they would represent a “get” from a stimulus standpoint, they may become part of the deal to increase the debt limit or pass the 2012 budget, such that there is one.
A couple things here. First, this gives more evidence for the axiom that once you enact a program like a tax cut, even if it’s time-limited, it becomes very hard to let it expire. This thinking animated the sunset of the 2001 Bush tax cuts (happy 10th anniversary), done to make the budget numbers look better.
The second part of this is that, while by the end of the year, the economy may be in such a state that it would be desirable to extend the payroll tax cut or to extend unemployment benefits, these things shouldn’t be seen as stimulus. They basically extend current law, so fiscal policy doesn’t tighten when they run out. Obama could have answered this question any way he wanted; his utterances don’t have the force of law. So the best he can come up with for an economic recovery plan in May 2011 would be to extend some one-year tax breaks and unemployment benefits in December 2011. That’s the essence of stay-the-course thinking. Not to mention the fact that, aside from the unemployment benefits extension, these ideas do not have great economic multipliers.
There’s also the fear that continual extensions of the payroll tax cut will put in peril the separate funding mechanism for Social Security, and lead to a drive to cut the program. That’s more of a speculative consequence, but it’s worth mentioning.
Finally, this is coming in the context of a drive to cut the budget deficit, something Obama himself initiated with a pivot eighteen months ago, and in which he is a willing participant. The fact that some stimulus measures could be extended will not calm the drive for cutting; in fact, in order to hit an overall number, Republicans may ask for MORE budget cuts to offset the payroll tax cut or unemployment benefits or business tax breaks. In that case, from a macroeconomic perspective these extensions wouldn’t matter at all. The overall fiscal policy would end up sharply negative.
A week ago, the President may not have talked about extensions of these measures at all. But in the context of the current crisis, these ideas barely register as a fix.