Congress can deal with jobs and deficit together
The Financial Times, December 11, 2009
Call it "the 3 per cent solution".
President Barack Obama's delicate manoeuvres this week on behalf of a new jobs bill shows that a political rift has opened up inside his party. On one side stand his liberal supporters, who tout costly new efforts to boost job growth. On the other stand more conservative Democrats (and virtually all Republicans), who say that reversing America's trillion dollar budget deficits and spiralling debt must be the priority. For now, the president hopes to finesse the situation by tapping unused bank bailout funds for any new stimulus. But there's a better way to bridge this divide in ways that meet the substantive and political goals of both Democratic factions.
Call it "the 3 per cent solution".
Mr Obama should ask Congress to pass a law that says that once unemployment is back down below 5 per cent (from 10 per cent), it would take a two-thirds vote of Congress to run deficits larger than 3 per cent of gross domestic product. That's the number most economists agree is sustainableas compared to the scary 12 per cent America will run this year.
This simple idea resolves the Democrats' dilemma. The trouble with the argument of debt and deficit worrywarts (including me) is that their fears are premature, because the economy is still operating well below capacity. Government needs to run outsized deficits until business investment and consumer demand recover. The alternative, despite the cries of some conservative ideologues, would be a return to prolonged recession. We should not turn off the deficit spigot until the recovery is unambiguously secure.
Beyond that point, of course, the debt foes are plainly right. Global markets need to know that once economic recovery is entrenched, the US will move back to fiscal sanity.
The question, therefore, is one of timing: when should the federal government shift its focus from boosting jobs and growth to reigning in America's unsustainable debt? It is also a question of how to communicate America's plans credibly, because markets will not look kindly on good intentions alone.
That is where the 3 per cent solution comes in. The logic is straightforward and transparent: America is not running huge deficits for the sake of it, but to get the economy back to full employment. America will thus commit to ending large deficits when unemployment has come back down. And it will add an extraordinary procedural hurdlethe two-thirds vote to run deficits above 3 per centto ensure compliance.
Critics with long memories may carp that this revives the empty deficit reduction targets of the 1980s, which "committed" to deficit numbers that were revised whenever they were too tough to meet. But this framework is very different. By properly linking the goal of reducing the deficit to the performance of the economy as reflected in the unemployment rate, this proposal would let President Obama use every fiscal utterance to reinforce the fact that he is running up red ink to create jobs and vanquish the recession he inherited. Meanwhile, polls show that even in tough economic times Americans are more worried about deficits than about having government spend more to tide them over. What member of Congress in such a debt-fearing land will refuse to be bound not to run big deficits once the good times return?
Critics will also (rightly) say this scheme offers no specifics or tough choices on how to get the deficit down. Needless to say, this is a concession to politics, but establishing the right framework for fiscal sanity is the critical first step. (While binding future Congresses can be tricky, rules such as those governing filibusters or budget "reconciliation" prove it can be done.)
Today White House aides say 3 per cent of GDP is, in fact, the president's long-term deficit goal. But there is a big difference in America's political culture between just saying so, and putting forward a binding proposal. The raging debate that results would persuade the world the administration means what it says. Add a bipartisan commission to develop options to meet the 3 per cent goal, and we would be on the path to progress.
Some variant of this 3 per cent solution can help the Democrats' warring camps square the economy's near-term needs with long-term fiscal responsibility, while giving every Democrat the benefit of advancing a coherent and defensible course.