The Economic Costs of the Fact That Obama Believes He Is Lucky
David Leonhardt:
A Mission Not Yet Accomplished - Economic Scene: For the second straight year, the recovery seems to be at risk of stalling. The economy grew at an annual rate of only 1.8 percent last quarter — eerily similar to the 1.7 percent growth last spring, just when job growth started slowing down. Fully 80 percent of people say the economy is in fairly bad or very bad shape, according to a New York Times/CBS Poll last month. More people say it’s getting worse than getting better, the opposite of a few months ago. White House advisers and Ben Bernanke, the Federal Reserve chairman, argue that the bad news is a merely a blip caused by bad weather, a temporary cut in military purchases and other one-time factors. They may be right, too. Stock market investors certainly share their optimism: the Standard & Poor’s 500 index is near a postrecession high. But both Wall Street and Washington were also optimistic around this time last year — too optimistic. The unfortunate truth is that the recoveries from financial crises have a habit of disappointing.
Crises do so much damage that they leave businesses and households predisposed to believe the worst and to pull back at the first hint of economic weakness. Households are slow to resume spending. Banks are slow to lend, especially to small businesses. Companies are slow to hire. All this is why the typical financial crisis has caused unemployment to rise for almost five years.... If it stalls out for a second year in a row, the consequences could be particularly bad. The specter of a “lost decade,” like Japan’s, would become commonplace.... I suspect that Mr. Obama’s advisers have remained publicly optimistic over the last few months because they consider optimism to be one of the few economic tools they have left. The sensible step for Congress would be to pair long-term deficit reduction with a mix of short-term tax cuts and aid to states, whose budget cuts are leading to layoffs. But Congress hasn’t shown itself capable of separating the short term and long term. So the odds of new legislation to help the economy anytime soon are roughly nil.
Even so, there are still two steps the White House can take, and now is the time.... The first step is to remember the economy’s vulnerability when negotiating a deal over the debt ceiling.... [I]t would be folly to start making... cuts immediately and potentially put people out of work....
The second step.... At the end of this year, about $225 billion of temporary tax cuts and emergency jobless benefits are scheduled to expire.... Given the legitimate concern about the deficit, many members of Congress will want to let these temporary tax cuts lapse. But if the economy remains weak, continuing them for one more year will make sense. Their economic impact is not small. Moody’s Analytics estimated that the economy would have 1.1 million more jobs at the end of 2012 if the tax cuts and jobless benefits were extended. Yet their impact on the long-term debt is minimal. Tiny changes in Medicare could more than pay a one-time, $225 billion bill.
Somewhere — in the White House or in the halls of Congress — somebody should be coming up with a plan to sell an extension of these measures. Persuading a financially battered public that it deserves another short-term tax cut isn’t likely to be too difficult...
