Dr Peter Morici: On Friday, forecasters expect the
US Labor Department to report the economy added
155,000 jobs in December—substantially less than is needed to pull unemployment
down to acceptable levels. The tax and spending package passed by the Senate and House provides little
prospects of improvement, as the US economy continues to suffer from
insufficient demand and will continue growing at a subpar 2% a year.
Factors contributing to weak demand and slow jobs creation are the huge trade
deficits with China and other Asian exporters and on oil. However, on the supply
side, increased business regulations, rising health care costs and mandates
imposed by Obama Care, 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 to 50 billion
annually from higher 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
On the supply side, higher taxes on small businesses will reduce returns on
investment—this will slow capital spending and new hiring in 2013 and even more
Small businesses now have more certainty—the assurance of more burdensome
regulations, health care costs and taxes and this will burden growth.
The economy must add more than 356 thousand jobs each month for three years
to lower unemployment to 6% and that is not likely with current policies.
That would require growth in the range of 4 to 5%. 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%, while a
few see it remaining steady. The wildcard is the number of adults actually
working or seeking jobs—the measure of the labor force used to calculate the
Labor force participation is lower today than when President Obama took office
and the recovery began, and factoring in discouraged adults and others working
part-time that would prefer full time work, the unemployment rate is 14.4%.
Though Congress has postponed Sequestration, the posture taken by the President
in negotiations with Speaker Boehner and by Vice President Biden in negotiations
with discussions with Senate Minority Leader 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 US credit rating by Moody’s is
increasing, and this will weigh on the investment plans of many US
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.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
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