The recent enthusiasm for reducing the deficit has me extremely discouraged.
Job creation is at a pace where we will be back at full employment (say in the 5% unemployment range) in . . . well, never. We still haven't seen job creation that will significantly reduce unemployment in a reasonable number of years. A drop in consumer spending caused this recession, so a rise in consumer spending will be required to fix it, but consumer spending, while it has been growing, has not been growing at a pace that would bring down unemployment at a reasonable pace. There is no particular reason to think that the rate of increase in consumer spending will accelerate any time soon. Housing prices are continuing to fall, and households are still carrying a lot of debt, so it's hard to see a reason for consumers to start spending substantially more of each paycheck. In short, there is no reason to expect strong economic growth for the next few years.
In this context, any reduction in government spending, or even any reduction in the rate of growth of government spending, will slow economic growth at a time when we can't afford to be slowing economic growth. Every $40,000 or so reduction in government spending will be around one more unemployed person. Since the population is steadily growing, even holding government spending stable will tend to help keep unemployment high. So when politicians of both parties talk about reducing government spending and the deficit, what I hear is politicians advocating for increasing unemployment.
Of course the Conservatives argue that reduced government spending will somehow stimulate private job creation, but I just don't see how. The only plausible mechanism by which government deficit spending holds back private job creation is by driving up interest rates which in turn reduces real investment. However, interest rates are at near record lows, so its hard to see how additional reductions in the interest rate would spark much more investment.
In any event, here is what the next few years look like to me at this point. Congress slows the growth of government spending, or even reduces it, over the next year. As a result unemployment falls only a percent or two over the next two years at best, and at worst it stays above 9% or even breaks into double digits. Economic stagnation going into the 2012 election results in Republicans taking the Presidency and possibly the Senate and increasing their numbers in the house. Then after 2012 government spending is cut at an increasing rate with the government under solid Republican control, resulting in high unemployment continuing and maybe getting worse.
What will 3-10 years of unemployment above 7% mean for America?
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