Should Health Care Be on The Backburner?

by William Galston | August 14, 2009

While the attention of politicians, pundits, and the people is focused on the increasingly bitter debate over health insurance reform, economic developments will have a more profound effect on the well-being of the nation and the fortunes of the Obama administration. Only an economy that provides a steady stream of new jobs and raises personal income can yield enough revenue to restore public confidence and finance the government we need.

As the economy struggles to stabilize, we find ourselves in a deep hole--even deeper than we knew. For the first time since the Great Depression, Floyd Norris reports that we have endured a decade with no private sector employment growth. In July 1999, there were 109 million Americans with jobs in the private sector; the comparable figure for July 2009 was ... 109 million. By contrast, at the depth of the 1981-82 recession, private sector job creation over the previous decade still averaged about 1.5 percent per year. Until the current downturn, Norris finds, the long-term annual growth rate for private sector jobs had not gone below 1 percent for nearly half a century.

Some parts of the private sector did much worse. Manufacturing employment, which stood at 18.4 million in July of 1999, plunged to 11.8 million--a 36 percent loss.

What can we expect over the next few years? Although there are many imponderables, a few things seem clear. Household debt, which peaked in 2007 around 130 percent of disposable income (almost twice the 1985 level), must come down substantially. Household wealth, which has taken a $14 trillion hit over the past 18 months, must be rebuilt. To do this, the savings rate, which dipped below zero in the middle of this decade, will have to rise substantially, and consumer spending, which propelled economic growth for much of the past two decades, will constitute a lower share of GDP. We will have to grow the old-fashioned way, through productive investment in innovation and human beings rather than with money borrowed for current consumption. The economic gears are likely to grind for some time before they shift. Growth and job generation will probably be slower than in recent decades until we complete the transition to a post-consumer economy.

There's no consensus on this point, however. Writing in The Wall Street Journal, Justin Lahart argues that employment is likely to recover more rapidly from this recession than it did in the previous two downturns. His reason: So many of the lost jobs have been in the service sector, which has a more pressing need than manufacturers to rehire workers as demand recovers. Moreover, the historical record suggests that the economy bounces back faster from steep recessions than from shallower ones. In the previous edition of the WSJ, Zachary Karabell suggested just the reverse: Larger companies benefit from their ability to focus on where the growth is or is likely to be. "As these companies profit from global expansion and greater efficiency," he says, "they have little or no reason to rehire fired workers, or to expand their work force in a U. S. that is barely growing."

Lahart and Karabell could both be right, of course--Lahart in the short term, Karabell in the long run. And in fact, a number of economists are raising their estimates for the next two or three quarters while predicting slow growth (2 percent or so) after that.

This is not a happy forecast, either for the country or for the Obama administration. It would mean stubbornly high unemployment, meager increases in disposable income, and continued revenue shortfalls at every level of government--hardly the formula for a contented citizenry in 2012, or for a comfortable reelection campaign.

In this challenging context, the president would be well advised to focus more on the economy over the next three years, and to persuade average Americans that the economy is as central to his concerns as is it to theirs. That means taking what he can get on health care and climate change and clearing the decks well before the end of the year. It means going on the road to highlight the job-creating results of the stimulus bill, with events each week for as long as it takes to make the sale. And it means crafting proposals design to stimulate new hiring, not just in the long run, but as soon as possible. A revenue-neutral swap of lower payroll taxes in return for broadening the base of the income tax code could command support even among some Republicans.

A jobless recovery helped undermine George H. W. Bush's reelection prospects in 1992. Its continuation weakened support for Bill Clinton's economic program and contributed to the Democratic Party's rout in 1994. If President Obama's political team is as good at governing as it was at campaigning, it will get on the jobs case--starting now.

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