The Exchange

How the Budget Deal Will Push Up Unemployment

The Exchange

By Peter Morici

Friday, forecasters expect the Labor Department to report the economy added 155,000 jobs in December—substantially less than is needed to pull unemployment down to acceptable levels.

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The tax and spending package passed by the Senate and House provides little prospects of improvement, as the U.S. 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 large.

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 next year.

Small businesses now have more certainty—the assurance of more burdensome regulations, health care costs and taxes and this will burden growth.

An Unsustainable Pace

The economy must add more than 356,000 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 unemployment rate.

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%.

No Solution

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 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.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland School, and a widely published columnist.

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