Obama's job summit challenge: creating jobs on a budget

"We went right back into a second depression. That certainly didn’t do anything to restore fiscal balance."

Obama is also hearing a different view on deficits, though. As he toured China recently, he heard from leaders there who want assurance that America will be able to repay the loans China is making, in effect, with its purchases of US Treasury debt.

Some economic research suggests that government efforts to stimulate the economy will be less effective when the government is deeply and chronically in debt.

A research paper published last month, for example, finds that stimulus spending – such as to create jobs – has often done more harm than good in emerging-market nations where public debt equals 50 percent or more of the gross domestic product (GDP). The risk is that the nation will be spending money that it can't really afford to borrow – and that the prospect of higher taxes or a debt crisis will keep businesses from creating jobs.

Although the US is an economically advanced nation, the lesson could still apply, says Enrique Mendoza of the University of Maryland, one of the report's authors. During the recession, tax revenues have plunged even as government spending on stimulus has soared. These trends, coupled with war spending and fast-rising costs for Medicare and Medicaid, could push US public debt to rise from about 40 percent of GDP in 2008 to more than twice that amount during this decade.

This finding, included in a broader study about fiscal stimulus by Mr. Mendoza and co-authors Ethan Ilzetzki of the London School of Economics and Carlos Végh of the University of Maryland, helps explain Obama's bind. It may be prudent to try to bolster a weak job market now, but the public debt may no longer be an off-in-the-future type of problem.

See also:

Boomerang kids: recession sends more young adults back home

Does US need a second stimulus to create jobs?

---

Follow us on Twitter.

Previous

1 | 2