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POLITICAL ECONOMY
Outside View: Unemployment likely to go up
by Peter Morici
College Park, Md. (UPI) Jan 2, 2013


US heading for abyss despite 'cliff' deal: Xinhua
Beijing (AFP) Jan 2, 2013 - China's official news agency warned the United States on Wednesday it was heading towards an "abyss you can never come out of" even though Congress backed a deal to avert the "fiscal cliff".

After the House of Representatives approved a bill which avoids tax rises for most Americans and delays automatic spending cuts, a commentary by Xinhua pointed to bigger fiscal challenges ahead for US lawmakers.

"As the world's sole superpower, the United States is clearly not Greece," Xinhua said. "But economics and common sense do not lie.

"People, or governments, can overspend for some time, but they simply cannot live on borrowed prosperity forever."

China, which has the world's biggest foreign exchange reserves, is a major buyer of US Treasury debt.

The state-run news agency identified the US public debt of nearly $16.4 trillion -- more than 100 percent of its gross domestic product -- as Washington's key challenge, calling it a "fiscal abyss" that made Europe's sovereign debt crisis seem a "mere hiccup".

"The most worrying thing about US politicians is that if they have come so close to falling off a 'cliff', they are far less likely to reach a deal to help their country climb out of an abyss," the commentary said.

"In a democracy like the United States, tax increases and spending cuts, the exact dose of medicine needed to cure its chronic debt disease, have long proved hugely unpopular among voters. So the politicians have chosen to kick the can down the road again and again.

"But as we all know, the can will never disappear," the commentary added. "Sometime and somewhere, you might trip over it and fall hard on the ground, or in the US case, into an abyss you can never come out of."

Forecasters expect the U.S. Labor Department on Friday to report the economy added 155,000 jobs in December -- substantially less than is needed to pull unemployment down to acceptable levels.

The tax-and-spending package passed by the U.S. Senate and House of Representatives provides little prospects of improvement, as the U.S. economy continues to suffer from insufficient demand and will continue growing at a subpar 2 percent 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 healthcare costs and mandates imposed by Obamacare, 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 "fiscal cliff" deal raises about $40 billion to $50 billion annually from higher rates on family incomes of more than $450,000 but also extends spending programs that were set to expire -- for example, long-term unemployment benefits; therefore, the new net impact on aggregate demand isn't 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, healthcare costs and taxes and this will burden growth.

The U.S. economy must add more than 356,000 jobs each month for three years to lower unemployment to 6 percent and that isn't likely with current policies. That would require growth in the range of 4-5 percent. Without better trade, energy and regulatory policies and lower healthcare costs and taxes on small businesses, that is simply not going to happen.

Most analysts see the unemployment rate inching up to 7.8 percent, 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 than when U.S. President Barack 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 percent.

Though Congress has postponed Sequestration, the posture taken by the president in negotiations with Speaker John Boehner, R-Ohio, and by Vice President Joe Biden in negotiations with discussions with Senate Minority Leader Mitch McConnell, R-Ky., 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. Follow him on Twitter: @pmorici1)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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