Washington's Last Hope to Prod Economy
Stimulus, easy money, tax relief -- all done with. So what kind of debt deal can really put us on the right track?
Washington has only one course left to give the sluggish economy a badly needed shot of adrenaline: to hammer out a credible plan to pare back the long-term deficit. With the recovery at a plateau and housing still in a deep slump, economic growth has slowed to a crawl. And job creation still is weak. Although few analysts expect a second recession, economists are downgrading their forecasts, predicting that output will stay sluggish all year — and possibly through 2014 or later.
What’s more, public disillusionment over the pace of the two-year-old recovery, combined with widespread worry over the massive federal budget deficits being projected for the next decade, has spawned growing uncertainty and a lack of confidence about the outlook. Both consumers and businesses are holding back, waiting to see whether the economy will get better or worse before committing to hiring and purchasing decisions.
Uncle Sam’s traditional array of stimulative fiscal and monetary measures has been stripped clean. The White House has exhausted its primary tool for digging out of a slump: injecting more fiscal stimulus into the economy. The administration has gone through some $800 billion in spending and tax relief, and hasn’t a prayer of winning congressional approval for a second round.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
At the same time, interest rates are already near zero, and the Federal Reserve has ended its “quantitative easing” program of buying up Treasury securities to pump more money into the economy. It won’t ease the money supply again for fear of intensifying inflation and driving down the value of the dollar. “Monetary policy cannot be a panacea,” Fed Chairman Ben Bernanke warns.
A serious plan for dealing with the deepening chasm between federal revenues and government spending is the only means left for policymakers to deal with the uncertainty and lack of confidence plaguing the economy. But here, too, the government’s machinery seems paralyzed. Even if congressional negotiators can agree on enough budget cuts to pass the debt ceiling bill, the deficit reduction package is likely to be modest, with little real impact on the critical longer-term budget problem.
The package of spending reductions now being discussed won’t even touch the big-ticket changes needed to put the nation’s fiscal house in order: paring back Medicare and other federal entitlement programs, overhauling the federal tax code, revamping the nation’s mortgage financing apparatus and spurring new oil exploration. Both parties are prisoners of their own strident rhetoric.
If the negotiations turn out as expected, lawmakers most likely will simply kick the controversy down the road once again, this time until just before the 2012 election. That will leave both parties even less enthusiastic about hammering out a serious budget plan than they are now.
As a result, there’s a growing fear among economists that the United States may be heading for the kind of lost decade that Japan experienced through the 1990s, after its financial bubble collapsed, leaving the economy anemic, with no way for policymakers to get out of the slump. Eventually, Japan’s problems worked themselves out, but it took years.
Both the nonpartisan Congressional Budget Office and the International Monetary Fund are predicting that economic growth in the United States will remain at about 2.5% a year for the foreseeable future. That’s sufficient to avoid tipping back into a recession, but not strong enough to bring down the jobless rate, now hovering at about 9% of the workforce.
And this time, the U.S. cavalry isn’t going to ride to the rescue.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Who Will Be the Beneficiaries of Your Wealth?
Deciding who you want to inherit your wealth, as well as when and how, is a crucial first step in estate planning. Here are the four beneficiaries to keep in mind.
By Adam Frank Published
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Car Prices Are Finally Coming Down
The Kiplinger Letter For the first time in years, it may be possible to snag a good deal on a new car.
By David Payne Published
-
Rising Cyber Threat of AI: The Kiplinger Letter
The Kiplinger Letter Security experts warn that generative AI brings new risks with no clear defenses. With AI's rapid adoption, businesses are vulnerable.
By John Miley Published
-
Kiplinger Special: The Long-Term Future of the U.S. Economy
The Kiplinger Letter Kiplinger's report into what it will take the U.S. to maintain a healthy economic growth rate.
By David Payne Published
-
The Fight Against Cancer Enters a New Phase
The Kiplinger Letter Breakthrough treatments hold promise for patients and investors.
By Matthew Housiaux Published
-
After Decades of Promise, the Virtual Reality Era Has Finally Arrived
The Kiplinger Letter VR is a paradigm shift for consumer technology. The tech has a long road ahead, but amazing hardware already puts the huge potential on full display.
By John Miley Published
-
AI to Power the Next Generation of Robots
The Kiplinger Letter There's increasing buzz that the tech behind ChatGPT will make future industrial and humanoid robots far more capable.
By John Miley Published
-
The Robots Are Coming... But Not For a While
The Kiplinger Letter There’s excitement in the tech sector over the potential of humanoid robots, but widespread adoption is likely to be years away.
By John Miley Published
-
Farmers Face Another Tough Year As Costs Continue to Climb: The Kiplinger Letter
The Kiplinger Letter Farm income is expected to decline for a second year, while costs continue to up-end farm profitability.
By Matthew Housiaux Published