Although the latest employment report proffered a little more hope for the economy, the job situation is far from healthy and election year pressures have mounted for Washington “to do something.”
Before we start crafting a lengthy agenda of possible remedies, it is important that we gain some perspective. First, it will be impossible to restore full employment quickly. The economy still needs to work through various imbalances, including consumer indebtedness and excess inventories of housing and commercial real estate in many markets. Second, as Carmen Reinhart, co-author with Kenneth Rogoff of This Time is Different, has pointed out, major financial crises frequently require a number of years before better economic performance can be achieved. Second, we may be expecting too much from our policy leaders. After all, some of the policies engineered in Washington (e.g., a fervent support of housing and significant and aggressive monetary ease) contributed to the recent financial blow-up.
Still, Washington could help the private sector recover, which is what will ultimately be required to drive economic growth. As a starting point, policies need to have a long-term perspective. This is a point that Jim Owens, Chairman of Caterpillar, Inc., made in his speech at the PLNU Dealmakers event on Friday, September 3. Mr. Owens emphasized the long-term planning horizon that companies need in running and investing in their businesses. For example, it frequently takes about five years for a firm to build a new plant and set up the various required supply chains.
Two policy areas could provide important support for the economy. First, an extension of the Bush tax cuts, including those for higher income brackets, would relieve some of the anxiety now weighing on business. Otherwise, taxes on income, dividends, and capital gains would see sizable hikes in January, which could possibly tip the economy back into recession. Second, Congress and the President need to craft a blueprint for future deficit reduction. While such a plan would not have to be implemented quickly, especially if the economy remains weak, it is critical to consumer and business confidence that a plan be put in place.