The tax-and-spending package passed by the Senate and House provides little prospect of improvement in employment, 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 are the huge trade deficits with China and other Asian exporters, as well as on oil. However, on the supply side, increased business regulations, rising health care costs and mandates imposed by Obamacare – and now higher taxes on small businesses – discourage investments that raise productivity and competitiveness and create jobs.
Higher Social Security payroll taxes were already rolled into growth projections for the new year. The budget deal raises about $40 billion to $50 billion annually from higher income tax rates on family incomes above $450,000 but also extends other spending programs that were set to expire – for example, long-term unemployment benefits. Therefore, the new net impact on aggregate demand is not large.
Higher taxes on small businesses will reduce returns on investment, and this will slow capital spending and new hiring in 2013 and even more next year. At least small businesses now have more certainty – the assurance of more burdensome regulations, health care costs and taxes. All of this will hinder growth.
The economy would have to 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 to 5 percent. Without better trade, energy and regulatory policies and 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 – the measure of the labor force used to calculate the unemployment rate.
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 real rate is 14.4 percent.
Congress has postponed the major budgets cuts known as “sequestration.” But the posture taken by the president in negotiations with House Speaker John Boehner and by Vice President Joe Biden in discussions with Senate Minority Leader Mitch McConnell indicates the administration and Democratic 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 better favor growth, instead of the United States, where higher taxes, spending and deficits are out of control.
Is a bad deal better than no deal at all? We’re all about to find out.