Full Faith and Credit
Two Mondays ago, The New York Times offered a contradictory message on America’s ballooning budget deficit. A front-page article, “Wave of Debt Payments Facing U.S. Government,” warned that higher future interest rates will soon add heavily to the cost of funding the national debt. Meanwhile, economist Paul Krugman, in his column published the same day, referred to the fear of massive long-term debt as an over-exaggerated “Phantom Menace.” He argued that Congress should continue deficit spending in order to boost the economy.
One might conclude from these articles that America is stuck between a rock and a hard place. If Congress takes Krugman’s advice and passes an ambitious jobs bill, it risks pushing the deficit to even greater heights. But if Congress eschews further recovery spending, employment and growth will remain anemic. However, the situation is far from hopeless; it is possible to take meaningful action on both the jobs and the debt front.
If you’re an American politician, there are many ways to commit political suicide in spectacular fashion. You can disappear for days to pursue a steamy Argentinian affair. You can vow to help O. J. Simpson search for the “real killer.” But if you really want to go out with a bang, you can propose a bill to raise the federal tax on gasoline.
The United States has, by far, the lowest gas tax in the developed world. The federal tax has stood at 18.4 cents per gallon since 1993, despite inflation and changes in gasoline prices. Gas taxes help fund transportation projects and encourage consumers to use oil efficiently. Economists favor this form of taxation, as it factors the negative effects of gasoline usage (traffic, road damage, pollution) into its price.
Last month, Ben Bernanke told the Brookings Institution that the recession “is very likely over.” Technically, he is correct: GDP will grow this quarter, and the International Monetary Fund projects a 1.5 percent increase next year. Yet unemployment reached 9.8 percent last month, a 25-year high, and will likely continue climbing. This is to be expected, as joblessness typically rises for nearly 18 months after GDP growth turns positive. Due to this recession’s severity, most economists expect unemployment to return to pre-recession levels in three to five years. As Bernanke acknowledges, it doesn’t feel like the end of a recession for many Americans.
Republicans have used this news to prematurely declare the American Reinvestment and Recovery Act a failure. This is intellectually dishonest, given that three-quarters of it has not yet been spent. According to the Council of Economic Advisors, even the fraction paid out so far added two to three percent to second-quarter GDP growth and created or saved hundreds of thousands of jobs (although the exact number is up for debate). Clearly, joblessness would be higher today without the stimulus.
Imagine being a child again, playing with your friends at the playground. Suddenly, another child, bigger and stronger than the rest, joins in. He insists on cheating and playing by rules that just apply to him. Predictably, he starts winning. You know this is unfair, but if you say something, he might beat you up. He looks pretty tough, after all. Better just to keep quiet and hope that the bully starts playing fairly.
In today’s global economy, China has become this neighborhood bully, defying established trade rules with impunity. This imposes a significant cost on the United States and presents a dangerous challenge to the free market.