Let's say I gave you three pieces of information about the U.S. economy. First, we have a terrible unemployment problem that's not solving itself anytime soon. Second, we're running big deficits that we expect will become unsustainable in the coming years, though there's no evidence that the market is even mildly concerned about them right now. Third, we can borrow for next to nothing because the world sees us as a rare safe harbor during a time of global economic turmoil. What sort of economic policy would you design?
It's not a particularly hard question. First, you'd want policies to create jobs, like a big tax credit for businesses that hire new workers and a large investment in rebuilding infrastructure. Then, you'd want a plan that brought both deficits and debt-to-GDP down in the coming years.
Typically, this is where you'd run into trouble: The policies to create jobs cost money, making it harder to reduce the deficit. The policies to reduce the deficit require you to cut spending and raise taxes, which tend to destroy jobs.
But, happily, America's lucky situation means you don't have to choose. We can borrow for nearly nothing right now -- actually, less than nothing after accounting for inflation -- and so the obvious answer to your dilemma is to borrow now to create jobs while putting in place a significant deficit-reduction plan that would begin once unemployment fell below, say, seven percent. If you didn't want to work very hard at coming up with all these plans yourself, you could just pass the White House's American Jobs Act now and then the Simpson-Bowles deficit-reduction plan after that.
Here's what December's jobs report -- assuming it doesn't get revised too much in either direction in the coming months -- tells us: The recovery is steady. Resilient. It didn't flag before the fiscal cliff. It didn't tumble amidst the uncertainty of the election. The U.S. economy just keeps chugging along.
But the recovery, though reliable, is still slow. As economist Justin Wolfers points out, the economy added between 132,000 and 181,000 jobs in each of the last six months. That puts average monthly job growth around 160,000. December's 155,000 jobs fits that trend perfectly. But it's a disappointing trend. At that rate, we won't see unemployment fall below six percent until well into the 2020s.
The policy we need is something like the policy I outlined above -- action to create jobs now combined with policies to reduce deficits later. But we're not getting it.
The fiscal cliff ended with more worst-of-both-worlds legislating. Compared to policy in 2012, the final deal is contractionary: It lets the payroll tax cut expire and raises taxes on the wealthy. JP Morgan estimates that the final deal will cut GDP growth by 0.6 percent in 2013. IHS Global Insight says the damage will be more like 0.4 percent off GDP. Either number is better than the recession we likely would've faced after a full-on swan dive off the fiscal cliff. But neither is good.
Moreover, the final fiscal cliff deal does little to reduce deficits. It doesn't come anywhere near stabilizing debt-to-GDP over the next decade.
Which is to say that the fiscal cliff deal fails all three of our premises about the U.S. economy. It doesn't solve the unemployment problem, or even help improve it. It doesn't solve the deficit problem, or even do much to improve that. And it doesn't take advantage of the insanely cheap money the United States has access to right now. All of which is to say, the fiscal cliff deal was just one more failure from a congress that specialized in disappointing us. It was better than falling off a cliff, but then, Washington shouldn't have been playing on the edge, anyway.