NY Times Editorial
Meanwhile, Back in the Economy
Published: July 30, 2011
The economy is in trouble, and Washington — fixated on budget slashing at a time when the economy needs more spending — seems determined to make matters worse.
On Friday, in the midst of the debt limit battle, the government reported that economic growth nearly ground to a halt in the first quarter of 2011, a far worse performance than previously estimated. The second-quarter growth number, a feeble 1.3 percent annual rate, is not nearly enough to stop unemployment from rising even higher.
Nor are there persuasive signs that absent more government support, conditions will turn around anytime soon. Indeed, they are bound to worsen if Congress approves deep near-term spending cuts as part of a debt-limit deal while letting relief and recovery measures expire.
We will leave it to the historians to figure out how both political parties, and many Americans, became convinced that austerity is the road to recovery. History provides evidence that it is not, including the premature budget tightening of 1937 that reignited the Depression.
For now, it is clear that the traditional drivers of recovery — consumer spending and residential real estate — have failed to rebound, with the latest report showing consumers extremely cautious about spending on anything and the housing market stuck at its post-bubble lows.
Weak demand leads to slow growth, and slow growth leads to high and rising unemployment, which then reinforces weak demand and slow growth, and so on, in a vicious cycle from which the economy, obviously, has found no escape.
It is a situation that cries out for help from the government, and yet the opposite is happening. As federal stimulus programs from 2009 have ended — including aid to states and infrastructure projects — state and local governments have also cut back, leading to layoffs and less spending on contractors and social programs. The fiscal drag will only intensify in the quarters to come if the near-term budget cuts being called for in the debt limit fight are enacted.
This is not an argument for spending without limits. Given exploding health care costs as the baby boomers retire, budget cuts are unavoidable — but they are not urgent. With the economy weak and interest rates low, austerity makes no sense.
At this point, deep cuts are all but inevitable. But there are sensible things to be done to limit the harm. Budget cuts should be timed to begin as the economy recovers. Congress should vote to extend the federal unemployment benefits program and the payroll tax cut for employees. Republicans will likely oppose even those basic measures. So the White House and Congressional Democrats are going to have to do a better job of explaining economic reality than they have done so far.
Here is one point to start with: Allowing just those two programs to expire at the end of the year would needlessly shave nearly a full percentage point from growth in 2012.
Other measures should also be taken quickly.
Lawmakers should pass a bill by Senator Richard Durbin, Democrat of Illinois, that could delay and reduce taxes on businesses, by forgiving loans for states that rebuild their unemployment funds. They should also reauthorize the highway trust fund, a crucial measure to repair infrastructure and create jobs, as called for in the Senate version of the transportation bill.
The administration should work to ease the rules for refinancing mortgages that are owned by Fannie Mae and Freddie Mac. Easier refinancings would lower monthly payments for potentially hundreds of thousands of borrowers in good standing and, in the process, free up spending money to spur the economy, at little or no cost to taxpayers.
Those are admittedly piecemeal steps to ameliorate huge economic problems. If the steps are not taken, policy makers are risking more quarters of anemic growth or, worse, renewed recession.
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