Add deficit reduction to the list of priorities waiting for improvement in employment

January 03, 2011

| MoneyRates.com Senior Financial Analyst, CFA

MoneyRates.com has emphasized the importance of improvement in employment to getting interest rates on savings accounts, money market accounts, and CDs moving upward. In addition, employment probably holds the key to what may be the most important economic issue facing the nation--deficit reduction.

What's been done to address unemployment?

In December 2010, President Obama's deficit reduction panel failed to muster the super-majority it needed to put an expedited proposal before Congress. In essence, the panel doomed itself by doing its job too thoroughly. Given the size of the deficit problem, the deficit reduction panel took the approach that the pain of fiscal responsibility would have to be shared by all interested parties. This was a realistic approach economically, but politically it simply insured that the proposal would have no shortage of enemies.

Where does employment enter the picture? The weak job market can be looked at as the clincher in ensuring that there is not a critical mass of political will to follow through on deficit reduction. Spending cuts and tax increases--which are the harsh realities of deficit reduction--will create a drag on the economy.

Persistent unemployment makes that a tough option, and one which Congress is unlikely to endorse. In fact, it went the other way last month with a compromise on tax cuts and extending employment benefits that will make the deficit problem even worse.

Effect on deposit rates

It's hard to predict what will happen if deficit reduction is not addressed effectively. There is one scenario under which it could benefit savers in terms of higher savings account rates, money market rates and other deposit rates. However, those higher rates would also be accompanied by higher inflation due to a weak dollar. Worse, there is a good chance that a loss of faith in America's ability to repay its debts would lead to global economic chaos.

A variety of special interests object to the price to be paid for deficit reduction in the short run, but that price is nothing compared to what everyone would pay for continued fiscal irresponsibility in the long run.

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