The US economy has just marked two years of recovery from its worst recession since the Great Depression. But few Americans are celebrating; indeed, most believe that the economy is still in recession. No wonder. Although gross domestic product has recovered to its pre-recession peak, employment has not.
America also faces a major fiscal challenge that must be addressed. But this is a long-run challenge. The short-run challenge is inadequate demand.
There is a logical way out of this policy conundrum: pair temporary fiscal measures targeted at job creation during the next few years with a multiyear, multi-trillion dollar deficit reduction plan that would begin to take effect once the economy is closer to full employment. Pass both now as a package. Unfortunately, current signals from Washington indicate that partisanship and politics will trump logic and premature fiscal contraction will undermine the anemic recovery.