Let’s Get Real About the Economy

The economy grew at a mere 2% annual rate in the third quarter, and the unemployment rate remains a shade under 8%. Though job creation has increased in recent months, the numbers aren’t large enough to make a significant dent in the unemployment rate while at the same time affording employment opportunities for new entrants into the workforce. Worse, of the 12.3 million Americans who are currently unemployed, nearly a third have been out of work for more than a year.

A weakening global economy, particularly in Europe and China, also bodes ill for 2013 since these are the two biggest export markets for American goods and services. Total U.S. exports are falling while the trade deficit in manufactured goods is widening. Consequently, after rebounding in 2011 and early 2012, industrial employment is now declining despite the recovery of the U.S. auto industry.

Adjusted for inflation, median household income is about where it was in 1995. Though the housing market appears to be recovering, 20% of homeowners with mortgages remain underwater. At the same time, since 2007 average home equity has dropped to $78,000 from $200,000, the lowest level since 1968. Lower real incomes and net worth for most Americans suggest consumer spending will be restrained for several more years.

Another drag on the economy is a record level of outstanding student debt. At nearly $1 trillion dollars, outstanding student loans now exceed total credit card debt. And speaking of debt, this year’s federal budget deficit will likely be the fifth in a row to exceed $1 trillion.

If the economy falls over the “Fiscal Cliff” early next year, taxes will balloon and federal spending will be cut dramatically. Indeed, uncertainty about a quick resolution of the country’s fiscal mess has probably trimmed half a percentage point from this year’s GDP growth, according to Mark Zandi, chief economist at Moody’s Analytics. (Hurricane Sandy will also retard GDP growth in the fourth quarter of 2012, though the rebuilding process next year may offer a small boost to GDP statistics.) Though perhaps an exaggeration, the National Association of Manufacturers predicts nearly 6 million jobs would be destroyed through 2014 and the unemployment rate could reach 12% if the country falls off the Fiscal Cliff. The non-partisan Congressional Budget Office reports less catastrophic results from falling off the Fiscal Cliff, but still predicts a significant recession in 2013 with unemployment rising to 9% if no action is taken.

Against a fairly dismal economic outlook, what policies can help rebalance the economy while promoting growth? First, President Obama and Congressional policymakers must reach a “grand bargain” to ensure the economy doesn’t fall over the Fiscal Cliff. Indeed, if the Fiscal Cliff is reduced or eliminated, we may actually see a “Fiscal Bounce” in the form of higher business investment. Second, tax reform — though much discussed — needs to be taken seriously. That means acknowledging that revenue increases, as well as spending cuts, are needed. (Last month, chief executives of more than 80 big U.S. corporations released a statement urging Congress to reduce the federal deficit with tax-revenue increases as well as spending cuts.)

A reconsideration of pending greenhouse gas (GHG) and other Environmental Protection Agency regulations could also help revive the economy. For example, the proposed GHG standards for the coal industry are estimated by the Manhattan Institute to cost the U.S. economy $700 billion. Why go down this road when GHG emissions in the U.S. are lower today than they were 20 years ago even though America is not a signatory to the Kyoto protocol?

These actions won’t get us to 4% growth any time soon. Indeed we’ll be lucky if the economy expands 2.5% in 2013. But the longer we delay major fiscal and regulatory reforms, the longer it will take to get the U.S. economy on a sound footing that can take us to the 4% target.

From: The 4% Growth Project

4 thoughts on “Let’s Get Real About the Economy

  1. Slowly, surely, but it’s moving in the right direction, say Democrats, who used the November numbers — 146,000 new jobs and the unemployment rate at a 47-month low of 7.7 percent — to reiterate their call for freezing income tax rates for most Americans while increasing marginal rates for the wealthiest taxpayers.

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