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24 July 2024

Obama jobs initiative hamstrung by heavy US debt: analysts

The huge deficit in the 2011 US government budget blueprint has created a "fiscal straitjacket" that makes it hard to boost spending to create jobs without serious side effects, analysts said.

President Barack Obama's proposed $3.8-trillion spending plan for the fiscal year starting October 1 calls for an additional $100 billion to bring down double-digit unemployment and boost overall economic activity.

Economists say the new effort is likely to have only a small impact on job creation, while the government cannot afford to dig deeper and spend more without imperiling the nation's finances.

"We have been put into a fiscal straitjacket," said Sung Won Sohn, economist at California State University.

"We are at a point that if we were to apply more stimulus, the cure might be worse than the disease. It would mean government taking a bigger share of real resources, which would mean productivity goes down."

Sohn added: "I think that on balance the president is doing the right things. I'm simply saying we're not going to come out of this hole as rapidly as some might expect."

The budget foresees the deficit narrowing only to $1.267 trillion in fiscal 2011, or 8.3 per cent of gross domestic product -- which would double federal debt held by the public to $15.686 trillion in seven years.

Many analysts say the heavy government debt and spending is a recipe for slow growth that will make a longer-term economic rebound more difficult.

"Cutting the deficit and generating new jobs are two contradictory goals at this point in the economic cycle," said Joel Naroff at Naroff Economic Advisors.

"If you think you can get both, you are either crazy or a politician."

Even with the new jobs push, the budget forecasts average unemployment to ease slightly to 9.2 per cent in 2011 and 8.2 per cent in 2012 after hovering at 10.0 per cent this year.

Cary Leahey, senior economist at the research firm Decision Economics, said the measures proposed by Obama are probably the most effective means of stimulating jobs they involve tax credits targeted mainly to small businesses that are likely to hire.

"You could get a modest amount of job creation from these measures," Leahey said.

"But it's a question of whether that helps bootstrap the rest of the economy. There's not a lot more you can do with the deficit this large."

Leahey said it is difficult to measure the effectiveness of the $787-billion stimulus passed last year or the current proposals in terms of jobs.

"Obviously the results appear disappointing because we have an unemployment rate of 10 per cent after spending around $300 billion of the stimulus to date," he said. "But it would have been worse without the stimulus so you can't really measure how effective it has been."

Economists say unemployment will come down gradually as businesses gain confidence to hire, but depending on consumers gaining enough confidence to spend more.

"We're really in a demand trap," said Naroff. "Businesses aren't going to invest or hire unless they get a picture that demand is picking up. And consumers won't start spending again until they see more jobs. Somewhere you have to break that cycle, and that's the attempt that is being made here."


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