The Best Economic Solutions Aren't on the Table

The economy is plainly stuck in second gear. For the third month in a row, new job creation in June, at just 80,000, was barely enough to keep the unemployment rate from rising, and not nearly sufficient to accommodate new entrants to the labor market and unemployed people looking for work.

Not only did the private sector fail to create enough jobs. With the crisis in state and local budgets and the absence of federal aid, the loss of public sector jobs continued. Ordinarily in a slump, public employment takes up some of the slack. In this recession, government has shed 627,000 jobs.

Here's the deeper worry. Not only could a weakening economy cost Barack Obama the election -- this slump could literally go on indefinitely.

In the aftermath of a financial collapse, the economy gets stuck in a downward spiral. Banks are too traumatized to lend, businesses see too few customers to invest, and there is too little purchasing power among consumers who are either out of work or who haven't seen a raise in a decade. The housing bust only adds to the downward drag.

Exports have been a bright spot, but as Europe succumbs to a similar vortex of recession compounded by austerity, Europe's even worse economic woes are likely add to America's.

Something similar happened in the late 1930s. Though economic growth returned, it wasn't strong enough to repair the damage of the Great Depression or create enough jobs. Despite the New Deal, unemployment remained stuck at around 12 percent.

World War II solved the problem -- it was the greatest accidental economic stimulus in economic history. It put people back to work, retrained the unemployed, and recapitalized industry. But today, there is nothing in the wings waiting to play the role of the Second World War.

During the war, federal deficits averaged more than 25 percent of GDP, nearly triple today's deficits. But that's what it took to blast out of the depression. After the war, high growth rates paid down the accumulated national debt.

What's needed today is a massive investment program, to shift the economy to a clean energy path, modernize infrastructure, increase productivity -- and along the way create millions of good jobs and restore consumer purchasing power. Then, the vicious circle could be reversed.

The problem is that neither party is proposing such a program. It is entirely outside mainstream debate.

President Obama is willing to have the federal government spend more money. But he has partly bought the story that deficit reduction has to come first. The Republicans would further gut the public sector.

Contrary to the conventional view that deficit reduction would somehow "restore confidence" and increase business investment, that's not how economies work. Businesses invest when they see customers with open wallets. Though the Congressional Budget Office projects higher growth returning around 2014, it bases these projections on a "return to trend." There is no plausible story about where the higher growth will come from.

If we don't get a drastic change in policy, we will be stuck in this rut for a generation or more.