Budget Deal Is a Tipping Point for the US Economic Recovery

Curious Capitalist

Budget Deal Is a Tipping Point for the US Economic Recovery

By Dec. 11, 2013
image: The sun rises on a cloudy morning at the Capitol in Washington, Nov. 13, 2012.
J. Scott Applewhite / AP

Whisper it—we may be at a tipping point in the US economic recovery. The announcement that U.S. budget negotiators have reached a provisional two-year deal to avert another government shutdown (which had been set to happen, sans deal, in early 2014) was fantastic news. For the last few years, government has been a headwind, rather than a help, to the recovery. If you’d have stripped the public sector out of the growth numbers over the last year or so, you’d find that the U.S. was already in a 3 percent growth economy, rather than the sluggish “New Normal” of 2 percent that we’ve all gotten used to. If this deal, which still has to be voted on in both the House and Senate, marks a move from gridlocked, partisan politics in Washington to something more constructive, that’s a big deal.

But the real proof of whether we’re truly in a stronger recovery will come toward the end of the first quarter of 2014 when business leaders are asked why they aren’t investing more of the $2 trillion on their balance sheets in the U.S. That would obviously spur job growth and lower unemployment, but executives often point to “fiscal uncertainty,” meaning that they have no idea given the recent history of gridlocked politics what policy will be around things like taxes and regulation. If the budget agreement is a sign that politics as usual is changing, and growth is back as it has been in the last quarter, then businesses should start spending some of that cash.

There are two counter-arguments as to why they might not. First, many smart people, including Alan Greenspan believe that it’s not short-term uncertainty, but long-term worries over how to fund entitlement programs like Medicare, Medicaid and Social Security that confound businesses. As Greenspan pointed out, short-term investments into assets in the U.S. are relatively stable. It’s when you start looking at asset investment 15 to 20 years out that things really fall off a cliff—which points to concerns over how to fund government as entitlements take on a bigger and bigger chunk of the overall budget.

The second issue is that the lack of middle market job creation isn’t really about a lack of investment, but rather a structural shift in the labor market. Six out of the 10 fastest growing job categories in the U.S. are $15-an-hour jobs. Globalization and technology related job destruction means that there’s plenty of work for PhDs and burger flippers, but not much in between. The coming year will be very telling in that respect—if we start to see some business investment and subsequent middle market job creation, we can all rejoice. But if we don’t (which is my bet), then the short-term jump in growth figures won’t mean much. And the long-term unemployed in this country will be feeling some new pain—the new proposed budget deal doesn’t say anything about extending unemployment benefits set to expire at the end of December.

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