How to Force Washington to Fix the Economy

Both parties should set aside all priorities except those that will definitively create jobs.


Politicians tend to suffer from attention-deficit disorder. The voters who send them to Washington every other November usually want them to do a few distinct things. Yet by the time the next election comes around, the party in power has usually undertaken reforms, makeovers, foreign misadventures, and free-market interventions that nobody really asked for. Little wonder that control of the government swings from one party to the other as often as it does.

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This year, the message is clearer than usual: Fix the economy. Yet both parties have an agenda that goes far beyond that. Humbled Democrats still want to work on immigration and energy reform in the lame-duck session of Congress between now and January. Emboldened Republicans want to undo President Obama's healthcare reform and many other measures passed over the last two years. Both parties seem to need constant reminders that the unemployment rate is stuck at nearly 10 percent, and millions of Americans need economic help. Now.

To keep the next Congress focused, I propose a 7 Percent Solution: Lawmakers are not allowed to pursue any reforms, repeals, new agendas, or old bromides unless they will directly help drive the unemployment rate below 7 percent. If Democrats want immigration reform, they'll have to show that it will help push unemployment down. Same for Republicans, if they want to shrink government, cut taxes, or change healthcare law. As for proof, the hollow slogans and made-up math of campaign commercials won't do. Every 7-percent proposal will have to pass muster with the Congressional Budget Office, which has often been the lone truth-teller in Washington when it comes to the cost of healthcare reform, tax cuts, and other partisan battles characterized by mathematical creativity.

Let's get aggressive about this. Forcing unemployment below 7 percent should be an urgent national priority, not a vague long-term goal. If Obama and the Congressional Democrats had gotten that message over the last two years, they wouldn't be in such desperate shape now. Yet they fiddled around with a handful of reforms that did little or nothing to bring back jobs, losing faith with voters. If Republicans make the same mistake, they should expect to suffer the same fate.

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Here's the challenge: CBO predicts that the unemployment rate will average 9 percent in 2011 and 8.1 percent in 2012, not falling below 7 percent until 2013. And CBO doesn't think unemployment will fall to 5 percent—once considered "full" employment—until 2015. Other economists think unemployment will go even higher and take even longer to come down. So it would be a notable achievement if we somehow drove unemployment below 7 percent in the next year or two, ahead of most predictions.

For the government to exceed expectations (ahem), it will have to put everything else aside, except for essential government functions, while focusing purely on ways to create jobs. (And if those other priorities are so important, then all the more reason to hurry up and push unemployment down.) I'll gladly defer to CBO scoring on the following measures, but until CBO gets around to it, here's my assessment on whether various pet projects of each party should be enacted immediately, because they would help create jobs, or postponed until job targets have been met:

Income tax cuts. Most economists agree that allowing the Bush tax cuts to expire on schedule at the end of 2010 would shock the economy, since it would reduce disposable income, cut into consumer spending, and probably force some companies to cut jobs even further. So Congress is likely to extend the tax cuts. There are two big questions: Will it be a permanent or temporary extension? And will tax cuts be extended for all taxpayers, or only those earning less than $250,000 per year? Whatever the outcome, the responsible way to extend the tax cuts—and the best thing for the economy overall—would be to identify corresponding ways for the government to recoup the lost revenue at some point in the future, when the economy is healthier. That could happen through reduced spending, higher taxes, or some combination of both. But don't hold your breath—Washington has become inept at covering its expenses, which is why the national debt is ballooning.

Verdict: Pursue. The right kinds of tax cuts could help the economy recover and add jobs.

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Business tax cuts. Some tax cuts increase business activity, while others merely enrich those able to claim the profits. And the last two years have offered some useful insights for tax reformers. The bank bailouts, for one thing, gave banks a boost similar to what they might get from a tax cut. Yet banks have been very reluctant to pass on the gain through easier lending to businesses and consumers. And big businesses overall have been enjoying record profits over the last year or so—but most still aren't hiring. So boosting profits doesn't necessarily translate into creating jobs. And like income tax cuts, business tax cuts should be offset by certain spending cuts or other revenue gains in the future—not by wishful thinking about multiplier effects that may or may not happen.

Verdict: Pursue (carefully).

Cutting government spending. This Tea Party imperative made a good campaign slogan—and it needs to happen sooner or later. But an abrupt reduction in U.S. government spending could easily unnerve global markets and even trigger a second recession. Investors are worried about the swelling U.S. debt, yet they also know that government spending remains an important contributor to GDP growth. In fact, economists are worried that private-sector spending won't be robust enough to replace the stimulus spending from 2009 as that fades over the next year. Investors would welcome a credible, long-term plan to reduce America's debt. They just don't want it to start tomorrow.

Verdict: Postpone until the unemployment rate falls below 7 percent.

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More stimulus spending. Many liberals want it, even though they're increasingly outnumbered. And they have a point—targeted government spending remains one of the most direct ways to create jobs quickly. Plus, there are plenty of ways the next Congress could improve upon the unpopular stimulus plan from 2009. By focusing on key types of infrastructure, the government could help fund projects that will make American businesses more productive and competitive, in addition to putting people to work today. It could back public-private partnerships that invest money based on free-market principles, not government imperatives. And it could offset the cost with guaranteed future cutbacks in government spending, instead of simply piling more debt onto the shoulders of future American taxpayers.

Verdict: Pursue.

Immigration reform. The biggest issue here—what to do about illegal immigrants already living in America—is a rancorous political sideshow when it comes to fixing the economy. It's well-known that there are millions of undocumented workers in America who get paid in cash, pay no taxes, and perform some jobs that would otherwise be done by American citizens. But they're largely unskilled jobs, not the kind that are at the core of a leading world economy. And whether you expel undocumented workers or lead them down a path toward citizenship, it's a drawn-out process that won't do anything to create the kinds of jobs we need.

Verdict: Postpone.

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Energy reform. President Obama is right when he says that the way Americans produce and consume energy is not sustainable. And various provisions of the 2009 stimulus plan directed funding toward programs that could help create green jobs. But Americans will continue to choose fossil fuels like gasoline and coal as long as they remain cheap, which will limit the adoption of new types of energy. And Obama's climate-change legislation involves complicated new rules on businesses, at a time when they're scrimping to save money and putting off hiring until the economic outlook is more favorable.

Verdict: Postpone.

Repealing healthcare reform. Undoing the law Obama considers one of his signal achievements is a top Republican priority. Yet healthcare reform neither created nor destroyed significant numbers of jobs (except among lobbyists), and repealing it won't do anything to create jobs either. Plus, Obama will veto any actual legislation, so Republican efforts to repeal healthcare reform would be largely symbolic. Most of the provisions don't go into effect until 2014 anyway, which leaves plenty of time for Republicans to address healthcare—if they can help get the economy fixed in short order.

Verdict: Postpone.

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Unleashing small business. Republicans are closer to the target when they talk about easing some of the regulatory burdens on small business that come from healthcare reform, financial reform, and a thicket of other government rules. If the next Congress is sincere about helping small business, it will pursue pragmatic regulatory relief instead of trying to win ideological points by repealing healthcare or financial reform in total. Obama could up the ante with a presidential task force charged with easing the regulatory burden on small business. This is one area where both parties could work together—if they really want to reduce unemployment, now.

Verdict: Pursue.

A visionary plan to create great jobs. Anybody have one? If so, speak up. Just make sure it's about real jobs and not the secret goals of the lobbyists who paid for your campaign.

Verdict: Pursue. Yesterday.