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That illustrates the challenge facing the Obama administration as it tries to shore up a still-weak economy saddled with painfully high unemployment while keeping an eye on dangerously high government deficits.
"The right combination is more fiscal discipline in the medium and long term and more support for the economy in the short term," former White House budget director Peter Orszag said last week. "I'm somewhat frustrated by the way the debate has evolved. It's almost like it's either one or the other, when we need both."
No one disputes that the economy faces a pair of existential threats. A severe financial crisis and near economic collapse â?? and the government's response â?? have driven the federal deficit as a share of national output to levels that were last seen when Berlin and Tokyo were occupied by American soldiers. In fiscal 2008, the last pre-crisis year, the budget deficit was $459 billion, or 3.2% of gross domestic product. This year, the red ink will top $1.47 trillion, equal to a staggering 10% of GDP.
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"The explosion of out-of-control government spending is about to overwhelm not just the public sector but the private economy and the social well-being of our land," Rep. Paul Ryan, R-Wis., author of a plan to dramatically shrink spending and deficits, said in a recent speech.
Though the recession likely ended in the middle of 2009, the 9.5% unemployment rate shows no signs of improving. The administration said last week that it expects the jobless rate to average 9% next year and remain stuck above 6% until 2015 â?? which would be the third year of the president's second term, if he gets one.
The jobs picture is worse than those numbers suggest. Almost half the 14.6 million unemployed have been jobless for six months or more. With each passing day, their skills become less relevant to employers' needs, and their risk of slipping permanently to the economic margins increases. The longer they go without work, the deeper the hit to their future earnings.
Victims of lengthy spells of unemployment in previous deep recessions ended up years later earning 20% less than people who remained steadily employed, according to research by economists Till von Wachter, Jae Song and Joyce Manchester.
Even after $862 billion in stimulus spending and the Federal Reserve's near-zero interest rates for two years, the economy's performance remains unimpressive. U.S. output expanded at an annual rate of 2.4% in the second quarter, down from 3.7% in the first quarter and less than half the rate of 2009's final three months.
Voters routinely put economic issues at the top of their concerns, approaching November's midterm elections. Yet, in a June Gallup Poll, 40% of respondents called the federal debt an "extremely serious" problem, vs. 33% who said that of unemployment.
No immediate danger
On July 23, the Obama administration updated its deficit forecasts, offering some good news about the current fiscal year, along with disappointing figures for the following three years.
The deficit for the current fiscal year, which ends Sept. 30, will be $84 billion less than the Office of Management and Budget projected in January.
Any celebration was muted, however, because the projected deficit for the following year, fiscal 2011, will be $149 billion larger than first forecast. Next year will be the third-consecutive year of annual deficits greater than $1 trillion, according to OMB.
The administration still expects the deficit to fall by half, as a percentage of gross domestic product, by 2013. In fact, it's committed to such belt-tightening, along with the other members of the G-20.
An economic recovery â?? which boosts tax revenue and reduces spending on programs such as unemployment insurance and Medicaid â?? is expected to have the greatest deficit-reduction impact.
"Growth is the single most important issue," Lael Brainard, undersecretary of the Treasury for international affairs, said in a speech last week.
If the deficit isn't reined in, investors eventually could refuse to continue lending Uncle Sam the money required to run the government â?? everything from the wars in Iraq and Afghanistan to unemployment insurance, Social Security and Medicare.
Once ignited, worries about U.S. creditworthiness could quickly snowball. The nightmare scenario: Investors shun U.S. government securities, forcing an abrupt resolution of the deficit via draconian spending cuts and tax increases like nothing in U.S. history.
For now, such dangers remain hypothetical. Yields on 10-year Treasury securities, which would rise if investors feared they wouldn't get their money back, are around 3%, well below their 5.5% average since 1990. That's because private-sector borrowing has yet to fully recover from its historic collapse during the financial crisis.
But investors could get spooked by any number of unforeseen events, as the European debt crisis earlier this year demonstrated. And once the economic recovery gathers steam, private borrowers will begin competing with the government for scarce credit.
"Then you're going to see much more significant upward pressure on government interest rates," Orszag said in a Brookings Institution speech. "It's impossible to predict when that's going to happen. We are in no immediate danger of it happening. But one of the strong motivations for acting sooner and quickly is to mitigate the risk that it does happen."
President Obama created a bipartisan commission to recommend ways to balance the federal budget by 2015, excluding interest payments on the national debt. Administration officials insist the commission represents a serious attempt to put the government on a sound long-term financial footing. Critics are skeptical.
"You and I both know the word 'commission' is an antonym for the word 'leadership,' " said Phillip Swagel, former assistant Treasury secretary in the Bush administration.
Republicans see the deficit and government spending as winning issues in the fall elections. They say the global flight to safe assets that has boosted the price of Treasury securities, and thus allowed the government to pay less for borrowed money, won't last forever. "There's been an unusual demand for safe, liquid places to park money. You can't assume the world is going to look that way a year or two from now," said Tony Fratto, deputy press secretary in the Bush administration.
Striking a balance
Administration officials insist they take the deficit seriously. The problem is that more aggressive deficit reduction now could siphon demand from the shaky recovery, potentially consigning some jobless workers to an even more extended sidelining. Likewise, further boosting the economy with additional government spending would drive the deficit higher, not lower.
Obama advisers say the way to resolve the apparent policy dilemma is through carefully sequenced moves. Shore up aggregate demand today and deal with the deficit tomorrow. About 70% of the $800 billion stimulus package will be spent by Sept. 30, the end of the current fiscal year. The administration has warded off calls from some liberal economists for additional pump-priming with a smaller package of measures, including aid to small business, cash for states to prevent teacher and police officer layoffs, and a continued tax credit. Combined, the proposals exceed $200 billion in annual spending.
The tension between deficits and jobs will be reflected this fall in the debate about whether to extend former president George W. Bush's 2001 and 2003 tax cuts. The administration, seeking to balance the twin policy needs, wants to minimize the budgetary impact by extending the cuts only for taxpayers with annual incomes below $250,000. Republicans and some centrist Democrats, arguing that any tax increase will hurt the fragile recovery, want to extend the cuts for all households.
The administration plan would cost $255 billion a year. Extending the cuts in their entirety would cost an additional $55 billion annually.
Economic shakiness is making it less likely that lawmakers will follow former Fed chairman Alan Greenspan's advice and allow the cuts to lapse on Jan. 1, per current law.
The economy, which has grown for four-consecutive quarters, added 563,000 private-sector jobs in the first half of this year. That's welcome progress compared with the depths of the crisis in January 2009, when the economy shed more than 750,000 paychecks. But mounting signs of renewed weakness are raising fears that the recovery already is petering out or that the economy could slide back into recession.
Last week, new orders for durable goods fell 1% from the previous month, the second-consecutive monthly decline. Outstanding consumer credit fell by more than $9 billion in May, according to the Federal Reserve. Factories are operating at 74% of capacity, well below the long-term average of 81%. And with the consumer price index having fallen for three months in a row, there are even worries about a debilitating deflationary spiral.
"It's pretty clear that the recovery is starting to fade," says economist Paul Dales of Capital Economics, who expects the economy to grow at an annual rate of 2.5% in 2011. That's well below the administration's 4% forecast.
As the bad news has accumulated in recent weeks, the public mood has further soured. Last week, the Conference Board reported consumer confidence dipped in July to 50. That's half the level expected for an economy that has emerged from a recession and 20 points below its customary reading in the midst of a downturn, notes David Rosenberg, chief economist of Gluskin Sheff in Toronto.
Growth at a reasonable price?
Despite the signs of weakening, and calls from the left for additional stimulus, Treasury Secretary Timothy Geithner said recently the administration believes it's time for the government to transition to a recovery led by private investment.
"There's a complacency about the current situation that's very troubling. It could well get worse," said Dean Baker, co-director of the Center for Economic and Policy Research. "The idea of worrying at all about deficits in the current time is just wrongheaded."
Administration officials insist they're striking the proper balance. "The president has put forward an ambitious program for job creation. There are legitimate questions and trade-offs to consider in taking action to support the economy. But we believe we have laid out a plan that targets growth in an effective and fiscally responsible way," Larry Summers, director of the National Economic Council, said in a statement.
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