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Economic Scene: More Than Taxing the Rich Is Needed to Fight Economic Inequality

November 28, 2012 by Leave a Comment

What’s more, raising more money from the wealthy might go a long way toward righting our lopsided economy — which delivered 93 percent of our income growth in the first two years of the economic recovery to the richest 1 percent of families, and only 7 percent to the rest of us.

Yet while raising more taxes from the winners in the globalized economy is a start, and may help us dig out of our immediate fiscal hole, it is unlikely to be enough to address our long-term needs. The experience of many other developed countries suggests that paying for a government that could help the poor and the middle class cope in our brave new globalized world will require more money from the middle class itself.

Many Americans may find this hard to believe, but the United States already has one of the most progressive tax systems in the developed world, according to several studies, raising proportionately more revenue from the wealthy than other advanced countries do. Taxes on American households do more to redistribute resources and reduce inequality than the tax codes of most other rich nations.

But taxation provides only half the picture of public finance. Despite the progressivity of our taxes, according to a study of public finances across the industrial countries in the Organization for Economic Cooperation and Development, we also have one of the least effective governments at combating income inequality. There is one main reason: our tax code does not raise enough money.

This paradox underscores two crucial lessons we could learn from the experience of our peers around the globe. The first is that the government’s success at combating income inequality is determined less by the progressivity of either the tax code or the benefits than by the amount of tax revenue that the government can spend on programs that benefit the middle class and the poor.

The second is that very progressive tax codes are not very effective at raising money. The corollary — suggested by Peter Lindert of the University of California, Davis in his 2004 book “Growing Public” — is that insisting on highly progressive taxes that draw most revenue from the rich may result in more inequality than if we relied on a flatter, more “regressive” tax schedule to raise money from everybody and pay for a government that could help every American family attain a decent standard of living.

Consider government aid for families. According to the O.E.C.D. study, our Temporary Assistance for Needy Families is the most progressive program of cash benefits for families among 22 advanced countries, accurately targeted to serve the poor.

But American family cash benefits are the least effective at reducing inequality. The reason is that they are so meager. The entire budget for cash assistance for families in the United States amounts to one-tenth of 1 percent of the nation’s economic output. The average across the O.E.C.D. nations is 11 times bigger. Even including tax breaks and direct government services, we spend a much smaller share of our economic output on family assistance than almost any other advanced nation.

The same pattern can be found across a range of government programs. The reason is always the same: their relatively small size. Over all, government cash benefits in the United States — including pensions, disability, unemployment insurance and the like — contribute about 10 percent to household income, on average, according to the study. The average across industrial nations is twice that.

Our budget reveals a core philosophical difference with other advanced countries. In the big-government social democracies like those of Western Europe, government is expected to guarantee a set of universal public services — from health care to child care to pensions — that are considered basic rights of citizenry. To pay for this minimum welfare package, everybody is expected to contribute proportionately into the pot.

Government in the United States has a different goal. Benefits are narrower. Social Security and Medicare follow a universal service template, but only for older Americans. Other social spending is aimed carefully to benefit the poor. Financed through a more progressive tax code, it looks more like charity than a universal right. On top of that, our philosophical stance virtually ensures a small government.

Progressive taxes make it hard to raise money because they distort people’s behavior. They encourage taxpayers to reduce their tax liability rather than to increase their pretax income. High corporate taxes encourage companies to avoid them. High taxes on capital income also encourage avoidance and capital flight. High income tax rates on top earners can discourage work and investment, too. So trying to raise a lot of money with our progressive tax code would probably not achieve the goal and could damage economic growth.

Big-government social democracies, by contrast, rely on flatter taxes to finance their public spending, like gas taxes and value-added taxes on consumption. The Nordic countries, for instance, have very low tax rates on capital income relative to income from work. And they have relatively high taxes on consumption. In Denmark, consumption tax revenue amounts to about 11 percent of the nation’s economy. In the United States, sales taxes and excise taxes on cigarettes and other items amount to roughly 4 percent.

Liberal Democrats have long opposed them because they fall much more heavily on the poor, who spend a larger share of their incomes than the rich. But these taxes have one big positive feature: they are difficult to avoid and produce fewer disincentives to work or invest. That means they can be used to raise much more revenue.

Public finances are under strain today on both sides of the Atlantic, as governments struggle to cope with our long global recession and the aging of the baby boom generation. In Southern Europe, the pressure to pare back universal welfare systems is intense. In the United States, political leaders on both sides of the partisan divide have realized that even our relatively meager package of social goods cannot be sustained with our slim tax take.

But the United States has one option that most of Europe’s flailing economies do not. Its tax revenue is so low, comparatively, that it has more space to raise it. A more efficient, flatter tax schedule would allow us to do so without hindering economic activity.

Bruce Bartlett, a tax expert who served in the administrations of Ronald Reagan and George H. W. Bush, told me last week that he thought federal tax revenue could increase to 22 percent of the nation’s economic output, well above its historical average of 18.5 percent, without causing economic harm. If President Obama tries to go down this road, however, he may have to build a flatter tax code.

“We should reform the tax system, no question,” William Gale, a tax policy expert at the Brookings Institution and co-director of the nonpartisan Tax Policy Center, wrote in an e-mail. “We are going to need to move beyond the current set of tax instruments to raise the needed revenues — a VAT and or a carbon tax seem like the obvious ways to go.” And Mr. Bartlett, who writes a column for The New York Times’s Economix blog, also pointed out: “We can’t get all the revenue we need from the rich. Eventually, everyone will have to pay more.”

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

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Economix: Obama vs. Romney, an Early Skirmish

July 20, 2011 by Leave a Comment

DAVID LEONHARDT

DAVID LEONHARDT

Thoughts on the economic scene.

A recent Twitter exchange between Bill Burton, a former adviser to President Obama who remains close to the White House, and Eric Fehrnstrom, a longtime adviser to Mitt Romney, highlights the different tacks the two 2012 campaigns are taking on issues.

On Monday, Mr. Burton pointed to Mr. Romney’s refusal at times to engage in the deficit debate in Washington, including the Republicans’ recent cut, cap and balance bill:

Things Mitt Romney probably won’t raise at his Wall St fundraiser: cut/cap/balance, gay marriage… what else? http://scr.bi/pWWhI4

Polls suggest that some of the main positions that Congressional Republicans have taken, like favoring a major overhaul of Medicare, may be unpopular with voters. In the 2012 campaign, Mr. Obama will almost certainly try to tie his opponent to some of the less popular positions of the Republican Party. That will especially be true of those positions that the ultimate nominee adopts during the primaries. (For now, White House officials view Mr. Romney as the clear front-runner.)

Republicans will no doubt respond that Mr. Obama is trying to change the topic from the state of the economy. Not long after Mr. Burton’s message, Mr. Fehrnstrom wrote back:

Positive economic news? MT@ billburton716 Things Romney won’t raise at his Wall St fundraiser: cut/cap/balance, gay marriage… what else?

On the whole, I’ve been struck by the similarity between Mr. Romney’s tone so far and Bill Clinton’s tone in the 1992 campaign. Their suggested remedies for the weak economy, of course, are far different.

My column this week has more on the subject.

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Economix: The Concentrated Pain of Job Loss

July 11, 2011 by Leave a Comment

DAVID LEONHARDT

DAVID LEONHARDT

Thoughts on the economic scene.

I wanted to add one other explanation — to those Catherine Rampell cited, in her much-discussed Sunday article — for why unemployment has not become a larger political issue. Given how high unemployment is, there are surprisingly few people who have experienced unemployment in the last couple of years. This is the flip side of the historically high average length of the unemployment: joblessness is concentrated among a subset of the population, rather than affecting a larger group of people for shorter periods of time.

One set of numbers from the Bureau of Labor Statistics makes the case. In 1982, the unemployment rate averaged between 9 and 10 percent — and fully 22 percent of the labor force experienced unemployment at some point during the year. In 2009 (the most recent year of data), the unemployment rate also averaged between 9 and 10 percent, but only (or maybe “only”) 16.4 percent of the labor force experienced unemployment at some point during the year.

Just as surprising, the share of the labor force that experienced unemployment in 2009 was lower than in the early 1960s, when the unemployment rate was generally below 7 percent. Why? Among other things, temporary layoffs were more common in the past than today.

Source: Bureau of Labor Statistics

To be sure, the concentrated nature of unemployment may not be as important as the other big explanations cited in the Sunday article. But the difference is still striking: In 1982, the share of people who experienced unemployment was more than one-third larger than in 2009.

I discussed the phenomenon in more detail in two previous columns, including one in 2009:

Instead of doing lots of firing and some hiring, many companies have done only some firing and virtually no hiring, the statistics show. And that isn’t all bad.

Try thinking of it this way: All of the unemployed people in the country are gathered in a huge gymnasium that’s been turned into a job search center. The fact that this recession is the worst in a generation means that there are many, many people in the gym. The fact that the economy is churning so slowly means that there is not much traffic into and out of the gym.

If you’re inside, you will have a hard time getting out. Yet if you’re lucky enough to be outside the gym, you will probably be able to stay there. The consequences of a job loss are terribly high, but — given that the unemployment rate is almost 10 percent — the odds of job loss are surprisingly low.

The reasons for the slow churn are obviously complex. The baby boomers are moving out of the ages at which people typically start businesses. The economy has shifted away from sectors, like manufacturing, in which temporary layoffs are common. Educational gains have slowed, which affects innovation. And the federal government was not willing, at least until recently, to make the kind of investments that spurred entrepreneurship in the past — building the highway system, supporting scientific research, creating the Pentagon computer network that turned into the Internet.

But whatever the causes, the effects of the slow churn are clear: the pain of this recession has been concentrated.

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Economic Scene: Big Business Leaves Deficit to Politicians

July 6, 2011 by Leave a Comment

If you want to understand why cutting the deficit is so hard, you can’t do much better than to look at the Business Roundtable.

The roundtable is one of the more moderate big-business lobbying groups. Its president is John Engler, the former Michigan governor, and its incoming chairman is James McNerney, the chief executive of Boeing. When roundtable officials talk about the deficit, they use sober, common-sense language that can make them sound more reasonable than either political party.

But the roundtable is actually part of the problem.

Rhetoric aside, it consistently lobbies for a higher deficit. The roundtable defends corporate tax loopholes and even argues for new ones. It pushes for a lower corporate tax rate. It favors the permanent extension of the Bush tax cuts. It opposes a reduction in the tax subsidy for health insurance, a reduction that was part of the 2009 health reform bill. Oh, and the roundtable also favors new spending on roads, bridges and other infrastructure.

It’s easy to look at the squabbling politicians in Washington and decide that they are the cause of the country’s huge looming budget deficit. Certainly, they deserve some blame. The larger problem, though, is what you might call roundtable syndrome.

In short, there isn’t much of a constituency for deficit reduction. Sure, plenty of people and special-interest groups say that they are deeply worried about the deficit. But they are not lobbying for specific spending cuts or tax increases. They aren’t marshaling their resources to defend politicians who take tough stands, like President Obama’s 2009 Medicare cuts or Rand Paul’s proposed military cuts.

Instead, many of the officially nonpartisan groups in Washington are even less fiscally responsible than the partisans. Public sector labor unions have fought changes to pensions and work rules that could lead to less expensive, more effective government. Private sector unions — along with the roundtable — have defended the huge tax subsidy for health insurance, which drives up health costs.

Labor groups have at least been willing to push for some tax increases. Today’s business groups struggle to come up with any specific deficit plan. Last year, the Business Council — a group of top corporate executives headed by Jamie Dimon of JPMorgan Chase — and the roundtable released a 49-page plan that simultaneously warned that projected deficits would “retard future growth” and called for policies that would add hundreds of billions of dollars a year to the deficit. That’s the essence of roundtable syndrome.

When I ask roundtable officials and other lobbyists about this contradiction, they show an impressive ability to avoid specifics and stick to their talking points. Mr. Engler, by e-mail, said, “A simpler, flatter tax system can be enacted in a fiscally responsible manner that better serves American workers and supports economic growth.”

Taken by itself, this statement is entirely accurate. The corporate tax code is a mess. A better code, say both conservative and liberal economists, would be flatter — that is, have a lower rate and fewer loopholes. Companies would then waste less time complying with the code and could still help reduce the deficit.

But the roundtable is not pushing for the simpler, flatter, fiscally responsible code that Mr. Engler mentions. It’s pushing for tax cuts for its members: a lower rate, the continuation of existing loopholes and the creation of new ones, like a permanent credit for research and a tax holiday for overseas profits. Mr. Engler and his colleagues, in other words, are lobbying for a more complex, less fiscally responsible tax code.

Given how much we’re going to talk about the deficit, I’d suggest requiring any self-proclaimed fiscal conservative to give specifics. You’re against the deficit? Great. How do you want to cut it?

The fact is, naming specific ways to reduce the deficit is no more technically challenging than naming new spending programs or tax cuts. To take the current debt ceiling negotiations as a benchmark, White House officials and Congressional leaders are looking for about $200 billion a year in deficit reduction. They could get it any number of ways.

Two different bipartisan groups — the Bowles-Simpson deficit commission and the Sustainable Defense Task Force — have called for roughly $100 billion a year in cuts to the military budget. Getting rid of farm subsidies would save about $15 billion. So would cutting the federal work force by 10 percent.

Allowing the expiration of the Bush tax cuts on income above $250,000 a year would raise about $60 billion a year. The expiration of all the other Bush tax cuts would bring in another $200 billion or so. Various changes to Medicare and Social Security — raising the retirement age, reducing benefits for the affluent, cutting back on some forms of health care — could cut spending even more. In the long term, with projected deficits well above $1 trillion a year, such changes will surely be necessary.

By the standard of specificity, a few of the most prominent politicians in the deficit debate end up looking more serious than many outside groups. Representative Paul Ryan, the Wisconsin Republican who heads the House Budget Committee, has called for the effective elimination of Medicare for everyone under 55 years old. Mr. Obama favors some Medicare cuts, the closing of several modest tax loopholes and tax increases on the affluent.

There are many potential objections to the Obama plan and to the Ryan plan. And neither would eliminate the deficit. But both plans would at least reduce it, which is more than you can say about corporate America’s deficit plan.

The deficit is one of those national challenges that will require tough choices and courageous leadership. Many of those choices and much of that leadership will have to come from politicians. But I’m guessing we won’t solve the deficit until the politicians get some help — and simply calling yourself a fiscal conservative doesn’t count as help.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

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Economic Scene: Even for Cashiers, College Pays Off

June 26, 2011 by Leave a Comment

It’s clear who made the right decision. The educated American masses helped create the American century, as the economists Claudia Goldin and Lawrence Katz have written. The new ranks of high school graduates made factories more efficient and new industries possible.

Today, we are having an updated version of the same debate. Television, newspapers and blogs are filled with the case against college for the masses: It saddles students with debt; it does not guarantee a good job; it isn’t necessary for many jobs. Not everybody, the skeptics say, should go to college.

The argument has the lure of counterintuition and does have grains of truth. Too many teenagers aren’t ready to do college-level work. Ultimately, though, the case against mass education is no better than it was a century ago.

The evidence is overwhelming that college is a better investment for most graduates than in the past. A new study even shows that a bachelor’s degree pays off for jobs that don’t require one: secretaries, plumbers and cashiers. And, beyond money, education seems to make people happier and healthier.

“Sending more young Americans to college is not a panacea,” says David Autor, an M.I.T. economist who studies the labor market. “Not sending them to college would be a disaster.”

The most unfortunate part of the case against college is that it encourages children, parents and schools to aim low. For those families on the fence — often deciding whether a student will be the first to attend — the skepticism becomes one more reason to stop at high school. Only about 33 percent of young adults get a four-year degree today, while another 10 percent receive a two-year degree.

So it’s important to dissect the anti-college argument, piece by piece. It obviously starts with money. Tuition numbers can be eye-popping, and student debt has increased significantly. But there are two main reasons college costs aren’t usually a problem for those who graduate.

First, many colleges are not very expensive, once financial aid is taken into account. Average net tuition and fees at public four-year colleges this past year were only about $2,000 (though Congress may soon cut federal financial aid).

Second, the returns from a degree have soared. Three decades ago, full-time workers with a bachelor’s degree made 40 percent more than those with only a high-school diploma. Last year, the gap reached 83 percent. College graduates, though hardly immune from the downturn, are also far less likely to be unemployed than non-graduates.

Skeptics like to point out that the income gap isn’t rising as fast as it once was, especially for college graduates who don’t get an advanced degree. But the gap remains enormous — and bigger than ever. Skipping college because the pace of gains has slowed is akin to skipping your heart medications because the pace of medical improvement isn’t what it used to be.

The Hamilton Project, a research group in Washington, has just finished a comparison of college with other investments. It found that college tuition in recent decades has delivered an inflation-adjusted annual return of more than 15 percent. For stocks, the historical return is 7 percent. For real estate, it’s less than 1 percent.

Another study being released this weekend — by Anthony Carnevale and Stephen J. Rose of Georgetown — breaks down the college premium by occupations and shows that college has big benefits even in many fields where a degree is not crucial.

Construction workers, police officers, plumbers, retail salespeople and secretaries, among others, make significantly more with a degree than without one. Why? Education helps people do higher-skilled work, get jobs with better-paying companies or open their own businesses.

This follows the pattern of the early 20th century, when blue- and white-collar workers alike benefited from having a high-school diploma.

When confronted with such data, skeptics sometimes reply that colleges are mostly a way station for smart people. But that’s not right either. Various natural experiments — like teenagers’ proximity to a campus, which affects whether they enroll — have shown that people do acquire skills in college.

Even a much-quoted recent study casting doubt on college education, by an N.Y.U. sociologist and two other researchers, was not so simple. It found that only 55 percent of freshmen and sophomores made statistically significant progress on an academic test. But the margin of error was large enough that many more may have made progress. Either way, the general skills that colleges teach, like discipline and persistence, may be more important than academics anyway.

None of this means colleges are perfect. Many have abysmal graduation rates. Yet the answer is to improve colleges, not abandon them. Given how much the economy changes, why would a high-school diploma forever satisfy most citizens’ educational needs?

Or think about it this way: People tend to be clear-eyed about this debate in their own lives. For instance, when researchers asked low-income teenagers how much more college graduates made than non-graduates, the teenagers made excellent estimates. And in a national survey, 94 percent of parents said they expected their child to go to college.

Then there are the skeptics themselves, the professors, journalists and others who say college is overrated. They, of course, have degrees and often spend tens of thousands of dollars sending their children to expensive colleges.

I don’t doubt that the skeptics are well meaning. But, in the end, their case against college is an elitist one — for me and not for thee. And that’s rarely good advice.

David Leonhardt is a columnist for the business section of The New York Times.

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Economic Scene: The Deficit, Real vs. Imagined

June 22, 2011 by Leave a Comment

But there is a little problem with discretionary spending.

According to the government’s official forecasts, discretionary spending is already slated to shrink significantly. Military spending will fall by 25 percent, as a share of the economy, over the next decade. Domestic programs will shrink even more, and by 2021 they will account for their smallest share of the economy since the 1950s.

I’m guessing you haven’t heard of these plans, however. That’s probably because plans is a bit of an exaggeration. Assumptions is a better word: per Congress’s orders, the baseline budget numbers unrealistically assume that future discretionary spending will grow only with inflation, rather than with population growth and economic growth, too.

As a result, Vice President Joe Biden, Republican leaders and the other deficit negotiators not only have to cut discretionary spending to make progress. They have to cut it even more than the Congressional Budget Office, the keeper of the official numbers, already assumes that spending will be cut.

And the scale of the cuts could do real damage. They could jeopardize food safety, highway quality and F.B.I. investigations. They could hurt the poor at a time when unemployment remains near a three-decade high. They could undermine education and scientific research, the best hopes for future prosperity.

The goal of deficit reduction can’t simply be arithmetic. It has to be philosophical, as well. In what ways is the private sector incapable of planting the seeds of future economic growth — and what, therefore, must the government do? What’s the least amount of spending needed to ensure a decent life for even the most vulnerable citizens? Who is in the best position to pay that money?

By many accounts, the debt ceiling negotiators, starting with Mr. Biden and Eric Cantor, the second-ranking House Republican, have made progress. They could potentially get to their goal — $200 billion in average annual deficit reduction over the next decade — with a combination of discretionary cuts and tweaks to Medicaid, Medicare and maybe Social Security. President Obama’s intention to withdraw troops from Afghanistan will help.

But even if the negotiators reach their short-term goal, they won’t be close to getting the deficit under control. That would require closer to $500 billion in annual deficit cuts over the next decade.

Eventually, the country will have to confront the deficit we have, rather than the deficit we imagine. The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control spending. The one we have is caused by the world’s highest health costs (by far), the world’s largest military (by far), a Social Security program built when most people died by 70 — and to pay for it all, the lowest tax rates in decades.

To put it in budgetary terms, the deficit we imagine comes largely from discretionary spending. The one we have comes partly from discretionary spending but mostly from everything else: tax rates, Medicare, Medicaid and Social Security.

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Taxes may be the toughest issue politically, but the mechanics of raising taxes are not all that difficult. As the 1990s demonstrated, the economy can grow rapidly even after a modest tax increase. As the last decade showed, a big tax cut doesn’t necessarily prevent mediocre growth.

Bruce Bartlett, a former Treasury Department official, has pointed out on The New York Times’s Economix blog that average federal tax rates are “lower for most taxpayers than they have been since the 1960s.” The government could raise about $60 billion a year by letting the high-end Bush tax cuts lapse and tens of billions more by reducing tax breaks for companies and individuals.

On Social Security and Medicare, Washington could start by reducing benefits for the affluent — that is, the people who have received the biggest pay raises and tax cuts in recent years and whose life expectancy has risen the most. When conservatives like Mitch Daniels, Glenn Hubbard and Greg Mankiw talk about means-testing benefits, they’re talking about exactly this: making the programs more progressive.

Beyond means testing, the most promising strategy on health costs is probably a combination of conservative and liberal ideas.

Medicare could get more serious about refusing to pay for health care that doesn’t make people healthier, as the Obama administration has urged. The program could also introduce more incentives for people to choose cost-effective care, as Republicans prefer. Medicare’s problems are large enough that every plausible idea deserves a chance.

Discretionary spending, as more than one-third of the federal government, obviously must be part of the solution. In particular, bipartisan budget groups have called for annual military cuts of about $100 billion, or about one-seventh of the total budget, which would begin to reverse the post-9/11 spending bulge. Social programs — which often fail to achieve their fundamental goals — could also stand some rigorous scrutiny.

But the problem with the current debate is just how much of the budgetary burden falls on a relatively small part of the government. It isn’t just any part of the government, either. It is the part that has the best record of turning today’s spending into tomorrow’s economic growth.

Tax cuts don’t deliver nearly the economic oomph that their advocates claim. Medicaid, Medicare and Social Security, central to a decent society as they may be, certainly don’t do much to plant the seeds of future prosperity. Discretionary spending really can.

Discretionary spending let the Defense Department build the Internet. It let the National Institutes of Health finance life-saving research. It has helped make possible the semiconductor, the broadband network, the highway system and airports.

If we’re smart, we won’t just avoid damaging cuts. We will even find a way to increase forms of discretionary spending. As history has shown, economic growth remains the best deficit-reduction strategy of all.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

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Economic Scene: The Economy Is Wavering. Does Washington Notice?

May 27, 2011 by Leave a Comment

Perhaps the most worrisome number was the one Macroeconomic Advisers released on Wednesday. That firm tries to estimate the growth rate of the current quarter in real time, and it now says annualized second-quarter growth is running at only 2.8 percent, up from 1.8 percent in the first quarter. Not so long ago, the firm’s economists thought second-quarter growth would be almost 4 percent.

An economy that is growing this slowly will not add jobs quickly. For the next couple of months, employment growth could slow from about 230,000 recently to something like 150,000 jobs a month, only slightly faster than normal population growth. That is certainly not fast enough to make a big dent in the still huge number of unemployed people.

Are any policy makers paying attention?

When the economy weakened in the first quarter, Ben S. Bernanke, the Federal Reserve chairman, and Obama administration officials said the slowdown was just a blip and growth would soon pick up. Today, many Wall Street economists are saying much the same thing: any day now, things will improve.

Maybe they will. But the history of financial crises shows that they produce weak, uneven recoveries, with unemployment remaining high for years. That history also shows that aggressive government action — the kind of action Washington took in 2008 and 2009, but not for most of 2010 — can make the situation much better than it otherwise would be.

The latest signs of weakness suggest that policy makers remain too sanguine. It is easy to see how the rest of 2011 could end up disappointing, much as 2010 did.

For one thing, there are specific forces holding back growth. Oil prices, though down in the last few weeks, are still 40 percent higher than a year ago and continue to siphon money away from the American economy to overseas economies. When I filled my gas tank last weekend, it cost $74, more than I think I have ever paid.

The housing market also remains in terrible shape. Europe is still struggling with its debt troubles. State and local governments continue to cut jobs.

These specific problems worsen the broader insecurity of both households and business executives — insecurity that is typical in the wake of a financial crisis. Long after the crisis itself is over, businesses are slow to hire and quick to fire. Thursday’s report on new jobless claims showed that they rose by 10,000, to 424,000, which is not a number associated with a solid recovery.

“Labor market gains may be faltering somewhat,” Joshua Shapiro, chief United States economist at MFR, a New York research firm, wrote to clients after the report’s release.

For households, already coping with miserly wage growth, that is another reason not to spend. The Commerce Department’s updated gross domestic product figures showed that consumer spending grew at an annual inflation-adjusted rate of only 2.2 percent in the first quarter, not the 2.7 percent rate the department initially reported.

The economy does still have some bright spots, and they could grow in coming months, just as policy makers and private forecasters are, once again, predicting. If North Africa and the Middle East do not become more chaotic, oil prices may continue falling. Vehicle production will probably pick up as the parts shortages caused by the Japanese earthquake end. The falling dollar will continue to help American exporters, as well as any domestic businesses that compete with foreign importers.

But there is no doubt that the economy has performed considerably worse in the last few months than most policy makers expected. The situation is now uncomfortably similar to last year’s, when the economy sped up in the first few months only to stall in the spring and summer.

The most sensible response for Washington would be to begin thinking more seriously about taking out an insurance policy on the recovery. The Fed could stop worrying so much about inflation, which remains historically low, and look at how else it might encourage spending. As Mr. Bernanke has said before, the Fed “retains considerable power” to lift growth.

The White House and Congress, meanwhile, could begin talking about extending last year’s temporary extension of business tax credits, household tax cuts and jobless benefits beyond Dec. 31. It would be easy enough to pair such an extension with longer-term deficit reduction.

Any temporary measures will eventually need to lapse, of course. But the current moment remains a textbook time to use them — when the economy is struggling to emerge from the aftermath of a terrible recession. The one thing not to do is to turn to deficit reduction too quickly after a crisis, as Europe is painfully learning.

Almost four years after the mortgage market first began to quiver and unemployment began to rise, Americans are understandably eager for good economic news. But wishing for it doesn’t make it so. You have to wonder whether the people in Washington have learned that lesson yet.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

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