David Leonhardt, Washington bureau chief for The New York Times, is answering readers’ questions about the economic landscape and President Obama’s prospects to enact the ambitious legislative agenda he laid out in his State of the Union address.
Mr. Leonhardt is the author of the e-book, “Here’s the Deal: How Washington Can Solve the Deficit and Spur Growth,” published by The Times and Byliner. Previously, he wrote the paper’s Economic Scene column.
Below are answers to selected readers' questions.
Q.
When the debt was the largest in history as a percent of GDP, in 1946, we had 27 years of mostly deficit spending. The debt in dollars doubled. But we had prosperity. Why don't we do that today?
— Len Charlap, Princeton, NJ
A. You're right that a country can have deficits and still pay down its debt, so long as the deficits are small enough and economic growth fast enough. And you're right that some government spending plays a crucial role in creating economic growth. The most important programs seem to be investments -- in education, scientific research, roads, bridges and the like -- that the private sector won't do on its own.
The Internet, the radio, the jet engine, much of biotechnology and the technique for extracting a form of natural gas known as shale gas all owe their beginnings to federal spending. This history is a major theme in "Here's the Deal."
But government spending and debt most certainly do not ensure prosperity. Federal debt is already high. The projections showing that annual deficits will fall in the next few years depend on some assumptions that may prove rosy. And as more baby boomers retire and health costs keep rising, projected deficits are projected to rise again, sharply, in coming decades.
As heartening as the recent progress on the deficit may be, the country still faces substantial long-term fiscal problems. If we don't deal with them, we are likely to have an economy that looks nothing like the prosperous economy after World War II.
Q.
Congressional Republicans recently decided against using the debt limit as a lever to force President Obama to enact spending cuts he wouldn't otherwise go along with. Is there any indication that Republicans will agree to a longer-term extension once the current limit is reached?
A. It's hard to know, but it's possible that the debt-ceiling fights will not continue. In the past, the extension of the debt ceiling tended to be an opportunity for the party that didn't hold the White House to grandstand about the deficit and debt. (President Obama, somewhat famously, did so in 2006.) In the end, though, the extension tended to pass without any concessions from the president.
In 2011, Congressional Republicans successfully negotiated such concessions from Mr. Obama. In recent months, he made clear that he would not negotiate over the debt ceiling again, citing the economic damage from the uncertainty over the last extension. Republicans have gone along, at least temporarily.
Polls suggest the last fight hurt Republicans more than Democrats, which suggests Republicans may ultimately agree to a long-term extension or simply a series of short-term extensions. On the other hand, they were indeed able to win some spending cuts in 2011, so some in the party continue to see the debt ceiling as a powerful tool.
The most cliched last line in journalism -- the kicker, as we say -- is: Time will tell. I can't think of another kicker here.
Q.
Why has the administration given so much focus to gun control in the past few weeks? With a Republican majority in the House and the fact that many Democrats would also vote against advanced gun control measures, would this kind of legislation have a chance of passing the House or the Senate?
A. Unlike past mass shootings, the killings in Newtown, Conn., shifted the national debate. Public opinion changed modestly, and Democrats who favor more gun control became more willing to push for it.
As you note, most Republicans and some Democrats oppose sweeping new measures, which is why an assault-weapons ban still seems unlikely. But some other measures may be able to win overwhelming support from Democrats and enough from Republicans to pass both the House and Senate. The two leading candidates are an expansion of criminal background checks on people buying guns and a new federal trafficking law to block criminal purchases.
A recent Pew Research Center poll found that 85 percent of Americans favor background checks. Support at so high of a level, combined with national attention to the issues, has the potential to create a majority in both houses of Congress.
Q.
The Wall Street macro indexes e.g. S&P500, DOW, are at or around historical highs. However I do not see corresponding growth in GDP let alone increase in employment rate to underpin this rally.
What is driving this and where is the money coming from? How does this benefit "middle America"?
— Arthur CHAN, Wilmington, DE
A. First, the indexes themselves are not at or near record highs when viewed properly. When adjusted for inflation, the Standard & Poor 500 index was more than 30 percent higher in 2000 than it is today. Including the value of dividends, the S&P was still about 5 percent higher in 2000 than now. And taking into investment costs, which nearly everyone pays, the gap would be substantially more than 5 percent.
I say this not to be an inflation nerd (though I am) but to make the point that the stock market is not in fact more valuable than it’s ever been. When Wall Street proclaims, “record high!” and we in the media repeat the claim, we’re presenting a false picture of reality. Stocks are still not as valuable as they were at the peak of the dot-com bubble.
Your larger point, though, is dead on. The S&P 500 (including dividends and inflation) is about 18 percent higher than it was five years ago, which is roughly when the recession began. The overall economy has not fared nearly so well. Gross domestic product was only about 2 percent larger at the end of last year than five years earlier. The unemployment rate is 7.9 percent, up from 5 percent five years ago.
For a complex stew of reasons – including, but not limited to, government assistance for the financial sector since 2007 – American companies and financial firms have recovered more quickly from the crisis than most of the rest of the economy.
Q.
What are President Obama's plans to lure high-tech manufacturing back to the United States?
He courts Silicon Valley and named Apple during his State of the Union, but Steve Jobs famously said manufacturing will never return for logistical reasons. Tim Cook, despite the return of a single Mac line, appears to have little desire to change the company's strategic plan.
A. My colleague Annie Lowrey responds:
David Leonhardt, Washington Bureau Chief, Answers Readers’ Questions
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