Jackies Pro Sports News - Rumors - & Scandals: For the US and UK economies, a lost decade looms

Monday, May 2, 2011

For the US and UK economies, a lost decade looms | Dean Baker

With the debate in the US shifting to deficit reduction, as in the UK, policy-makers are dooming us to a slow, jobless recovery

Last week, the commerce department released data on GDP for the first quarter that showed the economy growing at just a 1.8% annual rate. This brought the growth rate over the last year to just 2.3%, slightly less than the 2.5% growth rate needed to keep pace with the growth in the labour force.

It might have been expected that this closely watched number set off all sorts of alarm bells about the weakness of the recovery. Instead, it was buried in the business pages with the headlines dismissing the weakness as the result of bad weather.

The weather line should not have provided much consolation. Even a generous assessment of the impact of weather would not lead to a counterfactual of more than 2.7% growth for the quarter. This would raise the rate for the last year to around 2.5%, still a dismal pace for an economy recovering from a steep downturn.

The professional excuse makers seem to rely heavily on the weather. The drop in fourth quarter GDP in the UK was also attributed to the weather. But these folks apparently forgot that weather-related weakness should mean a sharp bounceback in the following period.

With the first quarter growth in the UK just offsetting the fourth-quarter decline, it is clear that weather does not explain economic weakness there, nor can weather explain the poor growth in the United States. The basic problem is that the US economy, like the UK economy, simply lacks much momentum and is likely to weaken further as the impact of the deficit cutting is increasingly felt.

Those boasting of the strong recovery have touted the fact that the unemployment rate has fallen by 1.3 percentage points since its peak in October of 2009. However, this decline is almost entirely attributable to people dropping out of the labour force, rather than people finding jobs. The employment to population ratio, the percentage of the population that holds jobs, is the same today as it was in October of 2009 and only 0.3 percentage points above the low hit last fall. In short, we have not been creating jobs at a sufficiently rapid pace to bring down the unemployment rate.

While the picture to date is bad, it is likely to get worse over the next year. The runup in oil prices is directly pulling money out of people's pockets every time they go the gas station. This could explain the fact of a sharp increase in weekly unemployment claims over the last three weeks to levels that are inconsistent with job growth.

In addition, house prices are again falling at double-digit annual rates, now that the first time buyers' tax credit has expired. At the current pace, homeowners stand to lose another $2tn in equity by the end of 2011, compared with the tax credit-induced peak reached in the summer of 2010. This will further depress consumption, as well as leading to more problems for banks due to underwater mortgages.

With the budget cutters reducing expenditures at all levels of government, there is yet another factor depressing growth. Finally, there are both personal and business tax cuts that are scheduled to expire at the end of 2011. These may be extended in some form, but if not, this will also slow growth over the next year.

If economic policy was driven by economic reality, then there would be a serious debate in Washington right now about possible routes for boosting demand. This would include calls for more fiscal stimulus, more aggressive monetary policy and a reduction in the value of the dollar in order to boost net exports.

Unfortunately, none of these items are on the table. The debate in Congress is over the best way to reduce the deficit ? in other words, how much and how quickly we want to slow growth further. At his press conference last week, Federal Reserve Board Chairman Ben Bernanke essentially swore off any further monetary stimulus and expressed his willingness to fight inflation that is not there. And no one in Washington seem seems to understand that amount we import is affected by the price of imports, so lowering the value of the dollar never enters the discussion.

This is a great recipe for continued slow growth and high unemployment. And few in Congress or the media seem to give a damn.