President Obama made the mistake of saying, “the private sector is doing fine.” While the choice of words was a mistake, his overall message about the relative strength and weakness of the private and public sectors was correct.
About a month ago, the Wall St. Journal reported that without state and local layoffs the unemployment rate would be 7.1 percent. That’s the rate without cuts; obviously if government were to not only refrain from cutting but actually engage in the backlog of construction projects and/or hire more teachers, cops, firefighters, etc the unemployment rate would be even lower.
As I wrote back in January, the public sector is acting as a huge drag on private sector growth. While the private sector may not be roaring along, it is producing moderate and steady growth in terms of both employment and GDP.
Now, questions about the long-term impacts of lowering unemployment through public spending are valid, and financing that spending through deficits is problematic. However, it cannot be said enough that with 10 year treasury bonds at under 2% investors are basically paying us to keep their money safe. WIth construction costs and borrowing rates both at historic lows it makes economic sense to invest in public works projects now rather than in 10 years when it will cost more both to hire the workers and to borrow the money.
The most sensible proposal I’ve heard to address both the sluggish economy and the mounting deficit is to reconfigure the trigger mechanism used in the last debt deal. Rather than have drastic cuts and tax hikes on January 1, 2013 both the cuts and the tax hikes should take place once the economy is growing at X rate and unemployment is below Y. They should probably also both be phased in more gradually.