CQ TODAY ONLINE NEWS
June 4, 2012 – 11:02 p.m.
Consumer Demand Missing from Jobs Debate
By Joseph J. Schatz, CQ Staff
Lawmakers insist job creation is job No. 1, but proposals on Capitol Hill are unlikely to ignite consumer demand that some economists say is too low to encourage job growth.
As members position themselves for the fall campaigns, the economy faces potential fallout from Europe’s troubles and attention is turning to measures the Federal Reserve may take to restart demand growth in the United States. That leaves a gridlocked Congress looking increasingly removed from any likely action addressing fundamentals of the economy.
The testimony of Fed Chairman
Bernanke has argued that persistent weakness in consumer demand has been the main factor preventing businesses from hiring. But that view hasn’t figured in much of the economic debate on the House and Senate floors.
Recent economic measures that have become law have been relatively small in their scope, including a rollback of securities regulation of startup companies and a renewal of the Export-Import Bank. House Republicans are seizing on the jobless report as they prepare for a summer vote to extend the 2001 and 2003 tax cuts due to expire at the end of the year, but the Senate is unlikely to act amid talk of a possible tax code overhaul next year.
The holding pattern on those tax cuts is part of the uncertainty in fiscal policy that some economists say is hindering business investment. But some also say that it’s not the primary drag on hiring.
“There is not adequate demand from final consumers for what our businesses can produce in this [market],” said Gary Burtless, a senior fellow at the Brookings Institution and former Labor Department economist. “If we were in a plane at 50,000 feet, that’s what it would look like.”
Mark Zandi, chief economist at Moody’s Analytics, said addressing the expiration of the tax cuts and looming automatic spending cuts would help matters. Still, although businesses are nervous about the so-called fiscal cliff, he said, “that’s not front and center.”
“The missing ingredient is confidence,” Zandi said. “Businesses are still very shell-shocked from the events of the last several years, and if anything goes off script, they pull back. Europe is off script.”
Bills Remain Partisan
The House passed legislation (
Conservative critics say the same is true of Senate Democratic legislation (
And November testimony from Douglas W. Elmendorf, director of the Congressional Budget Office (CBO), cast some doubt on business tax incentives in general. “A reduction in the cost of capital is likely to have less effect on a business’s decision to buy new machinery if demand for the business’s output is so low that the machinery would get little use,” he said.
Consumer Demand Missing from Jobs Debate
A 28,000 decrease in construction jobs, along with the entry of more job seekers, helped increase the unemployment rate from 8.1 percent to 8.2 percent from April to May. Burtless says any policy that would spur public infrastructure jobs would help boost employment. That’s why House Minority Whip
But the surface transportation reauthorization is tied up in a contentious conference.
Many economists and forecasters agree that uncertainty over what tax and spending policy will look like at the start of 2013 — when Bush administration tax cuts expire and a $98 billion discretionary spending sequester kicks in — may be a drag on the economy as the time gets closer. Drawing on research on policy and economic uncertainty by academics at Stanford University and the University of Chicago, some economists, including Kevin Hassett of the American Enterprise Institute, argue policy “uncertainty” peaked during the debt ceiling crisis last August, and is likely to do so again late this year, with potentially negative effects for the economy.
Timing on Taxes
The impact on the economy of the potential expiration of the tax cuts is far more difficult to assess.
Diane Swonk, chief economist at Chicago-based Mesirow Financial, said the fiscal questions might have been manageable in a better economy, but since they’re coming amid weak domestic demand and problems in Europe, the impact is magnified. “It’s a much bigger deal when you’re growing at 2 percent than when you’re growing at 6 percent,” she said.
While extending the tax cuts again would erase the immediate uncertainty and perhaps avoid a dip in economic growth, it would simply extend the status quo in tax policy. Whether such an extension, short of a broader deal to re-write the tax code and deal with the deficit, would actually boost growth remains an open question.
The CBO has estimated that if Congress extended all the tax cuts other than the expiring payroll tax cut and blocked scheduled spending cuts — and also made the same changes to the alternative minimum tax and Medicare payments to doctors that lawmakers generally carry over every year or two — gross domestic product would grow 2.1 percent in 2013, about the same as what is projected for this year, as opposed to the 0.5 percent projected if the scheduled tax hikes and spending cuts occur.
But Swonk says another temporary fix doesn’t help things. “It doesn’t solve the problem of the behavior distortion that comes into play,” she said. “It doesn’t help things unless it comes with a guarantee of a broader fiscal accord.”
House Republicans plan to spend much of their summer on bills that would roll back regulations, particularly for health care. “We also believe strongly that the uncertainty provided by the president’s health care bill is weighing down job creation,” House Majority Leader
Many conservative economists and analysts support this view. Others are more suspect about the impact regulations may be having in 2012, particularly since the laws creating the regulations were enacted into law more than two years ago and many provisions won’t kick in for another few years.
“If you are a business and thinking about stuff you would like to make or a service you would like to sell,” Burtless said, “the argument that these regulations and future burdens are going to slacken growth right now are not nearly as logical as a lot of people suggest they are.”