What then is to be done? There is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is resolved only by increases in confidence, borrowing and lending, and spending.
It is false economy to defer infrastructure maintenance and replacement when 10-year interest rates are below 3 percent and construction unemployment approaches 20 percent.
Policy in other dimensions should be informed by the shortage of demand that is a defining characteristic of our economy. The Obama administration is doing important work by modernizing export controls, promoting U.S. products abroad, and reaching and enforcing trade agreements. Much more could be done through changes in visa policy, for example, to promote tourism as well as education and health services. Recent presidential directives regarding relaxation of inappropriate regulatory burdens should be rigorously implemented to boost confidence.
The greatest threat to the nation’s creditworthiness is a sustained period of slow growth that, as in southern Europe, causes debt-to-GDP ratios to soar. Discussions about medium-term measures to restrain spending and raise revenue need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated by the president and Congress last fall, we might well be looking at the possibility of a double-dip recession. Substantial withdrawal of fiscal support for demand at the end of 2011 would be premature. Fiscal support should, in fact, be expanded by providing the payroll tax cut to employers as well as employees. Raising the share of the payroll tax cut from 2 percent to 3 percent would be desirable as well. At a near-term cost of a little more than $200 billion, these measures offer the prospect of significant improvement in economic performance over the next few years translating into significant increases in the tax base and reductions in necessary government outlays.
We averted Depression by acting decisively in 2008 and 2009. Now we can avert a lost decade by recognizing current economic reality.
The writer, a professor and past president at Harvard, was Treasury secretary in the Clinton administration. He was economic adviser to President Obama from 2009 through 2010.