July's dismal jobs report poses a dangerous dilemma for the country's officials.
The government has exhausted traditional measures to get the economy growing more briskly, having already cut interest rates to near zero and committed to more than $800 billion in fiscal stimulus. With conventional tools off the table, it might take a "Hail Mary" pass from policy makers to recharge the economy if an anemic recovery slows even further.
Most ideas have drawbacks. Infrastructure spending, for instance, has appeal in the Obama administration, because many of the nation's roads, bridges and tunnels need updating and because so many construction workers are dormant. But new spending would spark an outcry in the face of trillion-dollar budget deficits and no plan in place to reduce them. Republicans prefer tax cuts—permanent ones—but they also face deficit constraints.
Laura Tyson, a professor at University of California, Berkeley's Haas School of Business who served as President Bill Clinton's chief economic adviser, favors a big, long-term investment program funded through Build America bonds, federally subsidized taxable municipal bonds, and a national infrastructure bank, something President Barack Obama has proposed. The government would put in capital and the bank would raise its own debt to fund projects, sometimes partnering with private businesses. The catch: This also adds to government debt, only indirectly.
Robert Reich, who served as Mr. Clinton's labor secretary, proposes a payroll-tax holiday on the first $20,000 of workers' income, funded by a new social-security tax on workers' annual income of more than $250,000. Economic theory says low-income people are more likely to spend a dollar of added income than high-income people, so getting money in their hands gooses output.
"It could be done right away, immediately putting more money in the hands of consumers likely to spend it, and lowering the cost to businesses of new hires," Mr. Reich says. The catch: Because low-income people have so much debt to pay off, the theory might not apply.
Martin Feldstein, a Harvard professor who was President Ronald Reagan's chief economic adviser, wants to help small banks by making it easier for them to sell poorly performing loans to the U.S. Treasury's Public Private Investment Partnership by giving them extra time to write off the losses they would incur from these sales.
Because the deficit is an impediment to any proposal for the government to spend more or reduce taxes, Frederic Mishkin, a Columbia University professor and former U.S. Federal Reserve governor, says the real Hail Mary move would be taking concrete steps to address future deficits right now. If the Obama administration and Congress first come up with a credible plan to reduce the deficit over the long run, they will have more freedom to run deficits in the short run if needed.
"You want to set up a situation where there is flexibility," Mr. Mishkin says. "There really is a need for the Congress to get serious about long-run fiscal sustainability."
Addressing long-run budget deficits now, Mr. Mishkin adds, would give the Fed flexibility. The Fed could purchase more bonds to drive down long-term interest rates if the economy slumps back toward recession. It has already purchased $1.7 trillion worth of mortgage and government debt. One problem is the Fed is reluctant to buy government debt for fear of being accused of facilitating large government deficits, which could spark an inflation scare.
Mr. Mishkin notes that if Mr. Obama crafts a credible long-run deficit-reduction plan, the Fed would be less constrained by this worry and could buy government debt more freely. The hurdle is political: It requires Mr. Obama and lawmakers to sell hard choices to a skeptical public about controlling the long-run growth of Social Security and Medicare.
On Sunday, two former Treasury secretaries warned against introducing more federal stimulus. Former Clinton Treasury head Robert Rubin, appearing on CNN, said such a move would be "counter productive," and that policy-makers instead should craft a deficit-reduction plan that would go into effect by the end of President Barack Obama's term. Paul O'Neill, who helmed the Treasury under former President George W. Bush, said that the government should push for wholesale changes to the tax system. "I think that would give reassurance to the markets that we're coming back and we're creating the basis for capital formation and…savings as opposed to consuming everything in sight," Mr. O'Neill told CNN.
The Fed could take more radical steps if the economy enters a tailspin. When Japan fell into deflation in the 1990s, Mr. Bernanke, then a Princeton professor, urged the Bank of Japan to set an objective of 3% to 4% inflation. The reason: With interest rates pinned at zero, rising inflation would mean that the real cost of borrowing, which is nominal interest rates minus inflation, would be falling. In theory that would spur demand.
As Fed chairman, Mr. Bernanke has rejected that idea, in part because the U.S. doesn't have deflation now. But if deflation does set in, calls for inflation above the Fed's informal goal of 1.5% to 2% could become louder.
Other ideas are floating around. Bond markets have been buzzing lately about a Morgan Stanley proposal to loosen the mortgage-underwriting standards of government-owned Fannie Mae and Freddie Mac to encourage more refinancing and reduce monthly mortgage payments of homeowners. Morgan Stanley economist David Greenlaw says that could put $46 billion in the pockets of consumers.
He calls it "slam-dunk stimulus," but Treasury Department officials knocked the idea down. The catch: The government already has refinancing programs, such as the Home Affordable Refinance Program, which is open to borrowers with Fannie- and Freddie-backed loans. Moreover, bond investors and many bankers hate the idea because a refinancing boom would impose losses on them by reducing the value of their mortgage debt investments.
Bottom line: There are no slam dunks when it comes to solving this economic problem. Which raises what may be the biggest Hail Mary of all: Do nothing, and hope the economy heals itself.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
source: www.smh.com.au">online.wsj.com
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