The Economic State of the Nation Is Not Good

Posted on Wednesday, January 26, 2011

The economic state of the nation is not good. The President will surely address this fact in his State of the Union address. Unfortunately he faces three big impediments which limit the actions he can take: political opposition, the budget, and the limited tools available to any President. He faces a dragon but lacks a sword.
Yes, the economy is recovering from the recent recession but at a pace that is far too slow to significantly reduce the unemployment rate any time soon.
Although deficits are likely to shrink somewhat as the economy recovers, the longer-term picture, driven primarily by rising health care costs, is frightening and could spark a serious economic crisis at any time and threaten continued economic growth over the coming decades.
In addition, the nation's longer-term competitiveness is hampered by deteriorating infrastructure, an education system that leaves our students in the bottom ranks on international tests, and an energy sector that badly needs to be restructured in ways that slow global warming as efficiently as possible.
State and local governments face enormous budget shortfalls, exacerbating the jobs problem and limiting the role that they can play in addressing these challenges to our competitiveness -- whether in education, infrastructure, or energy.
Civil society - the thousands of nonprofit groups and individual leaders that do everything from feeding the hungry to providing shelter to the homeless and teaching English to new immigrants - are similarly facing hard times. Donations are drying up while the ranks of those needing assistance have risen.
Our current troubles follow decades during which middle class incomes rose at a snail's pace -- and chiefly because more women went to work. Most of the benefits of growth went to the top 1 percent of the population. In the meantime the proportion of people who are poor has risen to levels not seen since the 1980s and rates are projected to remain high for the rest of the decade. It is not just our families but also our economy that will suffer if we fail to redress this problem. Without broadly shared prosperity, there is insufficient demand for what we are able to produce. The middle class must have the purchasing power needed to fuel future job creation without a return to excessive borrowing and the unsustainable burden of household debt it created.
The President will, I'm sure, address these issues. But he faces serious constraints on what he can do.
The first constraint stems from our political culture and institutions. Most congressional seats are not competititve. With so many "safe" seats, whoever wins the primary usually wins the election. Yet the proportion of all eligible voters who turn out for primaries is very low and they tend to represent the extremes in each party. The upshot is that the U.S. Congress is not representative of the population as a whole but only of its more extreme elements, especially, as it turns out, on the Republican side of the aisle. This makes compromise difficult if not impossible. The President, who does represent a broader swath of the population, and who was elected not just by Democrats but by a large number of independents has no choice but to appeal to a broader public by putting forward a more centrist vision for the country but one that is honest about the challenges we face. He should make the appeal; but it may reap little in the way of legislative success.
The second impediment is deficits as far as the eye can see, leading to a shortage of resources with which to address the aforementioned challenges. The solution has to be to weed the fiscal garden by reforming both spending and taxes in a way that produces new resources once the economy has recovered. The President should endorse the ideas put forward by his bipartisan Commission on Fiscal Responsibility and Reform. As argued by former CEA chair Christina Romer, "the need for such bold action is urgent - both politically and economically."
The third impediment is unrealistic expectations about what government can do to address the above challenges. To be sure, monetary and fiscal policy are potent tools, but, at present, economically and politically constrained in what they can accomplish. According to the New York Times' Peter Baker, the President is frustrated by the dearth of new ideas for coping with widespread joblessness. Although new ideas might reinforce or symbolize the President's commitment to making jobs a priority, the health of the economy is primarily dependent on what the private sector does. Businesses right now are flush with funds. The President's efforts to reach out to the business community, to review regulations, and to forge new agreements with other countries on trade and intellectual property recognize this reality and could help. The trick here will be to rebuild confidence in a way that accelerates the recovery but not to set expectations so high that the public becomes disenchanted by the pace of the recovery and lingering joblessness. Competitiveness, for example, requires increasing productivity which can eventually spur employment growth in a global marketplace, but in the short run may actually slow job creation as businesses introduce more efficient processes. In the meantime, we should call on individuals to fill some of the gap by helping their neighbors, donating to nonprofit organizations, volunteering their time, starting small businesses, learning a new skill, or going back to school. Elsewhere I have suggested doubling the tax deduction for charitable giving as one way to strengthen these essentially private initiatives while simultaneously (but temporarily) encouraging high-income taxpayers to part with their accumulated wealth in a way that creates jobs.
These challenges are formidable. I would not want to be in the President's shoes. But in his wonderfully uplifting speech in Tucson, he spoke of a democracy as good as a child might imagine it. He cited the heroic actions of ordinary citizens in the face of an unexpected crisis. Our larger economic challenges require no less - not just from him but from all of us.
Isabel V. Sawhill, Senior Fellow, Economic Studies, The Brookings Institution

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