Prediction: Before too long, a deep-pocketed think tank will stage a debate between Lawrence Summers, the former Treasury secretary, and one of Carmen Reinhart or Kenneth Rogoff, the co-authors of the most influential book on economics published in recent years.
These economists have emerged as the intellectual leaders in the political struggle over debt that will define the course of the world’s largest economy.
This week will be a defining moment in that struggle. Democrats and Republicans failed to reach a compromise on raising the $14.3-trillion over the weekend, setting the stage of for an intense legislative schedule this week if default is to be avoided on Aug. 2, the day the Treasury Department says it will run out of ways to pay the U.S. government’s bills.
Politicians will test the faith of the global investors by taking the debate of raising the country’s legislative debt-ceiling down to the wire. On Friday, the government will release its first estimate of second-quarter gross domestic product, which analysts expect will paint a picture of an economy devoid of propulsion.
Mr. Summers, the Harvard University professor who led the Treasury under Bill Clinton and served as President Barack Obama’s top economic adviser, says the U.S. is not only in the midst of a debt crisis, but also a “jobs crisis.”
More than eight million people lost their jobs in the recession and less than two million of those jobs have been regained. Nearly half of the unemployed have been without work for more than six months, the highest ratio in the postwar period.
As Washington obsesses with cutting spending, Mr. Summers this month has repeatedly called on policy makers to extend payroll tax cuts and take advantage of low interest rates to finance a massive retrofit of the country’s infrastructure – anything to get people back to work. Talking to PBS talk show host Charlie Rose, Mr. Summers said the U.S. economy is approaching “stall speed.”
Ms. Reinhart and Mr. Rogoff have a different message: Get used to it. Their conclusions are based on years of exhaustive research compiling a database on centuries of financial crises. In their bestseller “This Time is Different: Eight Centuries of Financial Folly” and in several academic papers, Mr. Rogoff and Ms. Reinhart conclude that there’s just no easy way back from a credit bust. Banks are wary about lending and businesses and consumers are shy to borrow and spend. They are skeptical that much can be done to alter that dynamic, and are especially critical of the notion of fixing a debt problem by taking on more debt.
“There is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus,” Ms. Reinhart and Mr. Rogoff wrote in an opinion article published earlier this month by Bloomberg News. “Those who would point to low servicing costs should remember that market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly.”
The debate is vital because the U.S. economy is stuck in the mud. Treasury Secretary Timothy Geithner said Sunday that he thought second-quarter growth might come in at an annual pace of about 2 per cent – about half the rate needed to significantly lower the unemployment rate, which has climbed for three consecutive months, hitting 9.2 per cent in June.
Mr. Geithner was taking an optimistic reading of the latest projections. Over the past couple of weeks, analysts have been steadily lowering their forecasts for the second half of the year as indicator after indicator came in lower than expected.
Economists at Goldman Sachs Group Inc. in New York dropped their estimate for second-quarter growth to 1.5 per cent from a previous estimate of 2.5 per cent, and their estimate for the third quarter to 2 per cent from 3.25 per cent. On Friday, Royal Bank of Canada’s U.S. analysts cut their outlook for the second quarter to 1.8 per from 2 per cent and the third quarter to 2.5 per cent from 3.1 per cent.
“What the recent poor data-flow exposed is how fragile the backdrop truly is…and that cracks in the foundation abound,” RBC’s Tom Porcelli and Jacob Oubina said in a report. “Consider us worried.”
For a while, the weakness in the U.S. economy was explained away as a temporary skid caused by the disruption to global trade from Japan’s tsunami and nuclear disaster, and the surge in gasoline prices at the start of the year. But for the past two weeks, America’s biggest publicly traded companies have been reporting better-than-expected earnings, suggesting the issues facing the U.S. are more complicated that temporary shortages for Japanese parts and higher energy costs.
Mr. Porcelli and Mr. Oubina at RBC are concerned about consumption. They predict hiring over the second half of the year is unlikely to rise above the monthly average of 160,000 set over the first six months of 2011. That translates into a consumption rate of about 2 per cent, which is too slow to spur companies to hire.
In the past, a weak labour market hasn’t been such a drag on U.S. demand. Consumers would refinance their mortgages or run up the balance on their credit cards. But they aren’t doing that this time.
According to the RBC analysis, consumer loans on bank balance sheets are $57-billion (U.S.) lower than they were a year ago and only $20-billion above recent lows. Credit card debt also is lower than a year ago, and revolving home equity lines of credit are $50-billion lower than they were when the recession ended.
Nothing cures weak consumer demand like paycheques.
But surprisingly, jobs are not a focal point of the current economic debate in Washington.
At an event hosted by the New America Foundation on Friday, John Garamendi, a Democratic Congressman from California, said he had just watched President Barack Obama’s speak about the debt-ceiling debate on television, and was stunned that the president had said nothing about creating jobs.
A scan of Mr. Obama’s speech shows that Mr. Garamendi was exaggerating: the president uttered the word “jobs” once, saying he’d like to cut payroll taxes and give loans to private companies to repair roads, bridges and airports.
This shows Mr. Obama still listens to his former adviser. But the President isn’t prepared to take Mr. Summers’s flag over the ramparts. The White House’s emphasis, like most everyone else’s, is on reducing debt. If Mr. Summers isn’t put on a stage soon with either Ms. Reinhart or Mr. Rogoff, the debate may be over.