|A time to spend?|
|Monday, 05 September 2011 00:00|
The good news first: the US 2011 deficit is all set to fall to around a fifth lower than what was envisaged as recently as six months ago—from the February estimate of $1.65 trillion, the Office of Management and Budget (OMB) now estimates it will be more like $1.32 trillion, or a fall from 10.9% of GDP to 8.8%. The bad news, and this list is much longer, is that unemployment will stay high, at 8.3% in the 2012 election year (it rises to 9% under a slower-growth scenario) and GDP growth estimates have also been lowered from 2.1% in June to 1.7% now. Apart from being a serious political issue—and it’s not just about President Obama getting re-elected, the high unemployment has economic implications—how does consumer spending rise as long as unemployment is so high? According to the OMB report, while corporate profits rose from $906 billion in 2009 to $1,322 billion in 2011, employee compensation rose from just $7,812 billion to $8,264 billion.
Opinions vary across the US political spectrum, but Jared Bernstein, a former member of Obama’s economic team, uses the Congressional Budget Office’s (CBO) latest figures to point out that the $787 billion Recovery Act created around 2.5 million jobs and shaved 1.5 percentage points off the unemployment rate. So it looks like it’s time Obama came up with another big jobs push. We’ll hear more of that on Thursday. Given how the Republicans are playing hardball—they even forced Obama to postpone his speech by a day—the chances of getting anything passed look difficult.
How does this square up with the task of cutting the deficit? And does a stimulus help when the real US problem is what’s called a balance sheet recession—at 115% of disposable income, US household debt is better than the 130% it reached in 2007, but much lower than the average of 75% in the 1970-2000 period. There’s little doubt the US cannot get back to robust growth till this is fixed, but right now the US is one push away from a double-dip. And, in any case, unless there is GDP growth, the deficit/debt situation isn’t going to get better—as Morgan Stanley’s Stephen Roach points out, the CBO’s deficit reduction trajectory assumes a 3.4% annual GDP growth; a one percentage point shortfall in GDP growth, he says, leads to higher budget deficits of around $3 trillion over a 10-year period. Immediately, the US has to make big structural reforms—according to Jon Huntsman who is running for President in 2012, complying with the 17,000-page tax code costs taxpayers $400 billion each year; former President Bill Clinton, just out with 14 ways to increase jobs, bemoans the sharp rise in rules and regulations that make getting things done tough. In the medium term, the US needs to make expenditure cuts, if need be on Obama’s dream schemes, but it needs more jobs now.