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Budget deal will expand unemployment

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By Peter Morici
Thursday, Jan. 3, 2013, 9:01 p.m.
 

Forecasters expect the Labor Department to report that the economy added 155,000 jobs in December ­— substantially fewer than are needed to push unemployment down to acceptable levels.

The tax-and-spend package passed by the Senate and House provides little prospects of improvement, as the U.S. economy continues to suffer from insufficient demand and will continue growing at a subpar 2 percent a year.

Factors contributing to weak demand and slow jobs creation include the huge trade deficits with China and other Asian exporters.

On the supply side, increased business regulations, rising health care costs and mandates imposed by ObamaCare — along with higher taxes on small businesses — discourage investments that raise productivity and competitiveness and create jobs.

Higher Social Security payroll taxes already were rolled into growth projections for the new year. The budget deal raises about $40 billion to $50 billion annually from higher rates on family incomes above $450,000 but it also extends other spending programs that were set to expire, such as long-term unemployment benefits. Therefore, the new net impact on aggregate demand is not large.

Capital crunch

On the supply side, higher taxes on small businesses will reduce returns on investment, which will slow capital spending and new hiring in 2013 and even more next year.

Small businesses now have more certainty — the assurance of more burdensome regulations, health care costs and taxes, and these will burden growth.

The economy must add more than 356,000 jobs each month for three years to lower unemployment to 6 percent, and that is not likely with current policies. It would require growth in the range of 4 percent to 5 percent. Without better trade, energy and regulatory policies, along with lower health care costs and taxes on small businesses, that is simply not going to happen.

Most analysts see the unemployment rate inching up to 7.8 percent, while a few see it remaining steady. The wild card is the number of adults actually working or seeking jobs.

Labor force participation is lower today than when President Obama took office and the recovery began. Factoring in discouraged adults and others working part-time who would prefer full-time work, the unemployment rate is 14.4 percent.

Although Congress has postponed sequestration, the posture taken by the president in negotiations with House Speaker John Boehner and by Vice President Joe Biden in negotiations with Senate Minority Leader Mitch McConnell indicates the administration and Democrat lawmakers have little interest in substantially curbing health care spending and retirement benefits.

The likelihood of a downgrade in the U.S. credit rating by Moody's is increasing, and this will weigh on the investment plans of many U.S. multinational corporations. They invest and create jobs in Asia, where national policies favor growth, instead of the United States, where higher taxes, spending and deficits are out of control.

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former chief economist at the U.S. International Trade Commission.

 

 
 


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