CBO blames high unemployment on weak consumer spending

A report by the Congressional Budget Office last week urged U.S. lawmakers to boost consumer demand to help lower unemployment and strengthen the economic recovery.

“Slack demand for goods and services is the primary reason for the persistently high levels of unemployment and long-term unemployment observed today,” according to the report titled “Understanding and responding to persistently high unemployment.” The CBO projects the unemployment rate will remain above 8% until 2014.

To create jobs, Congress must address the anemic consumer demand, according to the CBO. Many Americans are spending conservatively as they slowly recover from the deep recession. Families are still struggling to recoup the losses they’ve suffered during the housing and financial crises. Some are focused on saving money and paying down their debts rather than spending money on new purchases. The continuing fiscal austerity is restraining consumer demand. Thus, many businesses are reluctant to hire workers due to the “increased uncertainty and pessimism” about the economy.

According to the CBO’s analysis, the most effective ways to shore up demand are by increasing aid to the unemployed, reducing payroll taxes, and cutting taxes for lower-and middle-income households until the economy strengthens. These measures would boost disposable income for people who need help and are most likely to spend the additional money goods and services, thereby improving the local economy. Reducing payroll taxes, particularly for employers, would give businesses incentives to hire new workers. While these policies would add to the nation’s deficit in the short-term, they could “substantially reduce unemployment during the next few years,” stated the report.

The job measures proposed by President Barack Obama are ranked by the CBO as highly effective in creating jobs and increasing economic growth. However, it’s worth noting that reducing corporate taxes and extending the 2001 and 2003 Bush tax cuts for the wealthy – two policies that are central to the Republican’s platform – are ranked as the least effective job creation measures.

The table below compares CBO’s recommendations with Obama’s proposed job measures:



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