Congress Can Create Jobs by Creating Demand

Now that the debt deal is done, congressional leaders have pledged to return from their recess to the really important stuff — jobs, jobs, jobs. Employment indicators, once relatively strong in the first quarter of this year, have soured in recent months, further enhancing the worry of a double-dip recession. The overall economic recovery to this point has been feeble. GDP growth calculations indicate that the economy grew at an annual rate of only 0.8% since Jan. 1. 

So thank goodness Congress is on the case. We can all breathe a collective sigh of relief. Unfortunately for Congress, there does not seem to be a clear cut way out of this recession, because the economy suffers from more than a lack of jobs: The issue is one of demand. Some economists have indicated that another round of stimulus and/or quantitative easing (QE) might be necessary to boost demand and produce job growth. In any case, such actions will be tough to bring about and are practically impossible within the current Congress.

The problem is that the environment is not ripe for recovery. Consumer demand fuels about 70% of GDP, compared to government spending, which accounts for around 20%. During the recession, consumers were already heavily indebted. To make matters worse, home prices fell, which meant many homeowners were paying down a mortgage that was worth considerably more than their home. As a result, demand fell drastically. The slowdown in consumer demand caused businesses to adjust and produce less, which meant they did not need as many workers as before; layoffs ensued. With increasing unemployment, demand fell further.

In order to "create jobs," then, Congress has to boost consumer demand. How do they do this? Well, Congress could provide stimulus — issue tax breaks or increase funds for projects, such as infrastructure improvements — in order to put more money in the pockets of consumers. However, based on current circumstances, any unexpected increase in disposable income will most likely be spent to pay down debt, or will be saved.

One might ask, how can Congress create jobs if they can’t boost consumer spending? This is a tough question. One possible element of a jobs plan might be a policy that allows households to reduce debt in order to lessen the debt burden and encourage spending. Congress might have to fall back to one of the policy actions mentioned above — stimulus through spending or tax cuts — and count on the fact that, while it won't increase spending, reducing debt now might get us to higher levels of spending faster.

All of this, however, might be a lot of hot air. The current Congress is ill-suited to tackle this issue. The Tea Party will not allow unfunded tax breaks or stimulus and will not agree to any revenue increases. This means if the Democrats want to boost consumer demand, they will have to agree to more cuts in spending, probably from their most sacred programs (and in such a debate, the Tea Party will again play the hostage taker).

Neither party has a serious incentive to boost demand in any case. The Democrats are loath to allow cuts to entitlement benefits for the weak, old, and poor in order to turn around and dish out the money haphazardly. Establishment Republicans may genuinely want to improve economic conditions, but not in such a way that allows Obama even a Pyrrhic victory, as the mere appearance of successful White House leadership hurts their narrative for 2012. Furthermore, having to deal with the Tea Party means that establishment Republicans do not have a lot of latitude in such a policy debate. It is better to prevent any substantial deal and ride the wave of government ineffectiveness to the 2012 election. And why not; government ineptitude is the GOP party's platform.

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