Furchtgott-Roth: Recession or Not, Jobs Recovery Years Away

Friday, 06 Jul 2012 01:35 PM

By Forrest Jones and John Bachman

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Whether the U.S. dips into recession or teeters on the edge of one, any U.S. jobs recovery is still years away, says Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute.

The U.S. economy added a net 80,000 nonfarm payrolls in June, below expectations of around 90,000 to 100,000.

Editor’s Note: Economist Unapologetically Calls Out Bernanke, Obama For Mishandling Economy. See What They Did.

While an improvement from May's revised figures of 77,000, the June jobs report shows full recovery in the labor market is at least five years way if healing continues at its current pace.

"We might be approaching a recession already, and we could actually continue on this path for quite a long time without going into a recession. The point is, even if we are not in a recession, the current rate of growth is not enough," Furchtgott-Roth tells Newsmax.TV.

"At the rate of 80,000 jobs a month it will take us about five years to get rid of the deficit of 4.9 million jobs lost since the beginning of the recession in December 2007."

New regulations outlined in the Patient Protection and Affordable Care Act or in the Dodd-Frank financial-sector overhaul law are hampering recovery by creating uncertainty for businesses, who are spending more time fretting over compliance and less time investing and hiring.

"We really need different kinds of policies. And what’s most important is to stop us going off the fiscal cliff January 1, 2013 when taxes are going to go up across the board for all Americans."

At the end of the year, the Bush-era tax cuts and other tax holidays expire at the same time automatic spending cuts agreed upon during the 2011 debt-ceiling accord kick in.

The combination of tax hikes and spending cuts could quickly siphon billions out of the economy, a scenario widely known as a fiscal cliff that could derail recovery if not addressed quickly.

Add to that, tax rates will rise now that the Supreme Court upheld the constitutionality of President Barack Obama's healthcare law.

Translation: expect hiring to remain at bay.

"It’s extremely difficult for employers if they have no idea what their tax rate’s going to be and also what the tax rate will be on capital. The rate on dividends would go, for example, from about 15 percent to over 40 percent," Furchtgott-Roth says.

"Rates on all income would go up, from the bottom, 10 percent to 15 percent. At the top, it would go from 35 percent to about 43 percent when you add in the new Medicare income tax."

Meanwhile businesses with 50 employees or more will face tax increases if they don't provide insurance for those workers.

Editor’s Note: Economist Unapologetically Calls Out Bernanke, Obama For Mishandling Economy. See What They Did.

"If an employer doesn’t have the right kind of health insurance policy and has more than 49 workers, moving from 49 to 50 workers is going to cost that employer $40,000 a year. That’s because the first 30 workers are exempt from the tax and it’s $2,000 per worker per year if you don’t have the right kind of health insurance. So $2,000 times 20 is $40,000," Furchtgott-Roth says.

"But an employer can avoid that if he lays off some of his full-time workers and hires part-time workers. So the incentive is to lay off full-time workers and hire part-time workers."

Meanwhile in Europe, where the European Central Bank recently cut interest rates by 25 basis points to 0.75 percent, Furchtgott-Roth says the economy may continue to deteriorate.

European leaders have held many summits to discuss ways to tackle the debt crisis, which is now more than two years old.

Recent measures such as allowing bailout funds to recapitalize banks and also invest more in government debt to lower interest rates in troubled countries like Spain and Italy met with market applause that quickly wore off.

No measures to date, be they stimulating or austere in nature, have been able to hit Europe's core problem of too much debt and not enough growth.

Furthermore, wealthier European countries must decide whether or not they'll be willing to shoulder more debt from periphery nations, where the crisis rages on.

“It is certainly going to get worse, because even though there have been approximately 19 different agreements between European leaders as to what to do about the economy, no one has figured out who is going to bear the costs of the insolvent loans. There are bad loans. The banks are holding bad loans. The question is, who is going to bail them out?" Furchtgott-Roth says.

"Is the taxpayer going to bail them out? Are the banks themselves going to lose money? Are the bondholders going to lose money? They haven’t figured out who is going to bear the losses and until they do that, the markets cannot recalibrate and investment cannot begin again in earnest.”

And while the U.S. might not be directly tied to Europe in terms of financial exposure, both the U.S. and Europe are major trading partners, and a deteriorating economy on one side of the Atlantic will affect the other.

“Europe can definitely affect the United States because Europe is one of our largest trading partners. If they stop buying our goods, our exports are affected," Furchtgott-Roth says.

"If our exports go down that means fewer jobs for Americans here at home. So this is of grave consequence to us.”


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