Five years after we entered a historic national recession, the U.S. economy is still only sputtering along. Why? Some say the recession was just too deep to expect anything but a weak and prolonged recovery. Some say the stimulus was too small or poorly targeted. Or the plan to stabilize housing prices was too big or too small. Or government is taxing people too much or too little.
All of these issues made for interesting debates during the presidential campaign. But none explains why the national economy is still so weak. Thankfully, the urgency of avoiding the “fiscal cliff” is leading Congress and the White House toward a political agreement that would finally begin addressing the economy’s chief underlying problem: the lack of confidence businesses and individuals have in Washington’s ability to ensure stable market conditions.
Business leaders — large and small — understand that Washington cannot continue running up massive deficits without producing collateral consequences, either in the form of higher interest rates, higher inflation or higher taxes. And when these outcomes are unknown, businesses play it safe — by not investing.Unlike in the run-up to the 2008 crash, when businesses took too much risk, today they are not willing to take risks we need them to take. In fact, businesses are sitting on record amounts of capital. By agreeing on a serious, credible plan to reduce the deficit, Washington will create the confidence about market stability that is necessary for that capital to be unleashed, creating new jobs and greater economic activity.
Both parties in Washington and both ends of Pennsylvania Avenue view the fiscal cliff in political rather than economic terms. That is, the White House is dead set on raising taxes, and Republicans are dead set on cutting spending — both for their own ideological reasons. As it happens, doing both things is also one of the best possible ways to spur job growth. Call it accidental economics.
The outlines of a solution that would give businesses the confidence to invest have been apparent for some time. Two years ago, the Bowles-Simpson commission outlined a solution that included tax increases and spending cuts. President Obama did not endorse it, and Congress did not seriously consider it. A year ago, the bipartisan “supercommittee” on deficit reduction could not even come to agreement on a scaled-down version of Bowles-Simpson, despite strong support from business leaders. And then election-year politics prevented anything substantive from happening for the next 12 months. Progress in Washington is so painfully slow in part because the election calendar is so painfully long.
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