U.S. solution to debt not feasible | The Triangle

U.S. solution to debt not feasible

Shawkat Hammoudeh

The United States suffered from a financial crisis in 2008 that spread to the real economy and became a global crisis. Research has shown that economies that suffer a recession brought out by a financial crisis will have a lengthier period to get out of the slump and longer time for the ensuing recovery to gain traction. This clearly applies to the U.S. 2008 financial crisis.

The U.S. has experienced a weak and choppy recovery since it started in July 2009. The low growth has kept unemployment high, which reached 9.2 percent in June 2011 — the highest for this year. To lower unemployment rates, we need higher growth that creates more than 300,000 jobs every month. At this pace, unemployment should drop to 6 percent by 2016. The reason for the weak economic recovery is bad balance sheets for all parties involved: consumers, businesses and government. The households are still in debt with a debt to disposable income of more than 113 percent and have also suffered a decline in wealth as result of the financial and real estate crises. Businesses do not have good balance sheets and do not find appropriate demand coming from the consumers, which make up 70 percent of the economy. The government is suffering from both high budget deficit and high debt. Moreover, there is a debt ceiling approaching quickly.

The above analysis says that there is a crisis in both the private demand (consumption and investment) and the aggregate demand (consumption, businesses and government spending). If consumers and businesses cannot spend, then the government should come up to the plate because the problem is a crisis in aggregate demand. Let me bring up two examples where the government’s action helped in creating jobs and increasing employment. The first example is the American Recovery and Reinvestment Act of 2009 which authorized tax credit, tax cuts and transfers to individuals and local and state governments. Although half-hearted, this policy increased government jobs and most likely promoted private investment. Since this stimulus policy stopped, government jobs declined and private sector’s employment weakened. Government jobs and government spending have declined for the last nine months. The second example is economic growth and job creation in the state of North Dakota. The state has the highest economic growth in the United States (probably 10 percent vs. 1.8 percent for the United States as a whole). The unemployment rate is 3.1 percent vs. 9.2 percent for the whole country. It’s true that this state is increasing its oil production, but its government has diligently worked on creating jobs by introducing both tax cuts and increasing state spending to stimulate the state’s aggregate demand.

In conclusion, the U.S. tried both fiscal and monetary solutions to stimulate economic growth to create jobs and move out of the slump. But the fiscal solutions were half-hearted and could not do the job. The monetary solutions (QEs) were experiments in the domain of liquidity trap. The U.S. should revisit the fiscal stimulus and introduce more meaningful stimulus package in the amount of one trillion dollars over the next two years. But this is not fiscally possible now as everyone in this country is keenly aware of the sensitivity of the budget deficit and the debt problem to all Americans. Well, we have to separate the short-run (the next two years) from the long-run (the next 10-20 years). We should be working on dealing with the deficit and the debt problem in a framework of 10-20 years now. At the same time, we should work on the low economic growth and high unemployment now over the next two years.

Let me inject here the argument advanced by Nobel Prize winner Paul Krugman which says that household and business debt is not the same as government debt if the debt ceiling is lifted. The government spending is not constrained like households, and in a liquidity trap government, spending can enhance capacity utilization and enhance private investment. Governments can pay their debt after the private spending constraint is lifted, or deleveraging has improved private balance sheets.

But what I said above is politically unfeasible. How are we going to finance the one trillion dollars in government spending over the next two years? We can finance the new fiscal stimulus by bringing the troops from Iraq and Afghanistan home as Congressman Barney Frank suggested. But this will make the fiscal solution more politically unfeasible. Look, we have new realities and we have to live within those realities. The United States should take care of the United States and not “Israel” and those “wars of choice” that do not fit the United States or any country on this plant. Let “Israel” make its own “wars of choice” and pay for them with its shekels. The United States should work on its OWN low economic growth and its high unemployment.

Shawkat Hammoudeh is a professor of economics. He can be reached at op-ed@dev.thetriangle.org.