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.

America’s economic performance in 2009 seems to be a RINO: recovery in name only.  Though third-quarter GDP growth was positive at 2.8 percent, this figure is lackluster compared to GDP growth in post-recessionary periods in the 1980s and 1990s.  Worse, unemployment has reached 10.2 percent, a 25-year high, and is still climbing.  Economists expect it to peak early next year, but it is likely to remain elevated for some time; the Fed expects an unemployment level of 8 percent in 2012.

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.

But lawmakers, pandering to drivers, steadfastly refuse to consider increasing the gas tax. This shortsightedness has serious economic and environmental consequences. Although a major investment in our transportation infrastructure is long overdue, the Federal Highway Trust Fund, which uses gas-tax revenue for road construction and repair, is near broke. This necessitates yearly billion-dollar infusions from the federal budget and discourages new transportation projects. Even the U.S. Chamber of Commerce, not exactly a tax-happy bunch, favors a higher gas tax, since better transportation infrastructure will benefit businesses.

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.

Regardless, Congress recognizes that further action is necessary to combat unemployment. Proposals under debate include increased aid to states, a business tax credit for new hiring, and extended unemployment benefits. These measures, while helpful, constitute a Band-Aid response to a much larger problem. Given that many job losses are concentrated in construction and manufacturing, a superior plan would directly stimulate demand for raw materials and finished products. With America in need of profound investment in 21st-century infrastructure, and so much labor currently on the sidelines, the obvious solution would fund a massive transportation and school-construction program and provide greater support for green energy endeavors. As a presidential candidate, Barack Obama promised to support these initiatives; now is the time to transform rhetoric into action.

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.

Since the 1970s, most currencies have been free to fluctuate, or “float,” in response to changing economic conditions. China’s currency, the yuan, was once pegged to the dollar. Although technically it has floated since 2005, China only allows the yuan to fluctuate in a narrow, artificially low range. The People’s Bank of China maintains this position by buying about $200 billion worth of U.S. dollars per year from currency markets in order to purchase American treasury bonds. This increases the value of the dollar relative to the yuan.