Jewish World Review March 13, 2012/ 19 Adar, 5772
We still need a recovery from this recovery. Here's how to accomplish it
By Mort Zuckerman
http://www.JewishWorldReview.com | The illusion of another "morning in America" being just around the corner is created by the optimism naturally radiated by a president and an administration asking for four more years, buttressed by various federal, fiscal, monetary, and bailout programs and higher levels in the stock market spurred by low interest rates. The prospect of prosperity all this engenders is an illusion. The U.S. economy has never really emerged from the Long Recession. It was much sharper than anyone comprehended, including the administration.
That was understandable, given the pandemonium of the financial meltdown it inherited. But the fact remains that, in the administration's fourth year, major sectors of the economy, including residential fixed investment, commercial construction, and inventory-building, are going nowhere. American families have suffered a huge meltdown of household net worth of more than $9 trillion since the 2007 bubble peak and a decline of almost $2.4 trillion in the third quarter of 2011 alone, the steepest decline since the fourth quarter of 2008.
At this stage of the cycle, the economy is normally accelerating at a 5-plus percent pace. Not so now. It has slowed to a 2 percent rate. Usually we would be debating what kind of V-shaped recovery we are experiencing, and whether the rise of the upward diagonal threatens inflation. We do not have the elastic rebound that occurred in the early 1970s when a 3.2 percent decline from 1973 to 1975 (Nixon-Ford) was followed just four quarters later by a 6.2 percent bounceback. In the early 1980s (Reagan), we had a 2.7 percent peak-to-trough decline in gross domestic product, which was followed by a 7.7 percent recovery in the first four quarters of the expansion period. This time, the annual rate of GDP growth since the recession ended is 2.4 percent (with inventory growth making up one third of this cycle), despite a stimulus program that was unprecedented in size. This is the weakest recovery ever in terms of the growth rate in real final sales, employment, housing, and organic personal income, not to mention that every measure of consumer and small business sentiment is locked in recession terrain. If this were a normal post-recession recovery, given the fiscal and monetary stimulus, GDP growth would be approaching 8 percent now.
In today's political situation, with gridlock in Congress, there are not too many tools left in the toolbox. During the years surrounding the Great Depression, people could look around at the Golden Gate Bridge, the Hoover Dam, LaGuardia Airport, and so on, and see something for their money. Not this time. If anything, the failure of the president's $787 billion stimulus has discredited deficit spending altogether. On the monetary side, the administration's program was based on the hope that the Federal Reserve's increases in liquidity and record low interest rates could buy time, that something might reignite the economy and growth could be sustained without reliance on government steroids. There, too, the upside has been disappointing. Fed Chairman Ben Bernanke himself acknowledges that the pace of expansion has been "uneven and modest by historical standards."
What of the shopping rush we were told about? As reported by David Rosenberg, chief economist of Gluskin Sheff, retail sales in January illustrate how the economy is undergoing the slowest, weakest recovery from any recession in the last 60 years. When you strip out the stuff that is not discretionary spending, such as food and fuel, sales barely rose, increasing by less than 0.1 percent versus an average of 0.5 percent over the prior three months; it was the weakest showing since last May.
And nonseasonally adjusted retail sales actually showed the steepest decline since 2006. The holiday shopping season was dismal, with core sales up only 0.2 percent in November and declining by 0.4 percent in December. In real terms, sales may have actually contracted at the beginning of 2012. Not since the end of World War II has U.S. consumer spending been sluggish for so long. With oil prices poised to break the $4-a-gallon threshold soon, this may continue; tens of billions of dollars are being siphoned from consumers' pockets into their gas tanks.
People were cheered by the headlines touting the 200,000-plus increase in non-farm payrolls for January. Let's look deeper at the statistics. Seasonal adjustments generally produce a net slide of 2.9 million jobs in January, but this time the fall in the number of jobs was "only" 2.65 million and, abracadabra, we "created" over 200,000 jobs. What passed for job increases on a seasonally adjusted basis, however, was due to the less than normal winter layoffs, thanks to warmer weather that enabled people to keep working. We have managed to recoup a mere 3.3 million jobs from the 8.8 million lost in the recession that theoretically ended three years ago. The employment to population ratio slid last year to 58.5 percent, approaching a 30-year low, revealing just how much slack there is in the job market.
American incomes continue to fall. The income of the average American household is less than 1 percent greater than it was in 1989. Despite the creation of 1.6 million non-farm jobs in the past year, real personal disposable income is down 0.1 percent. As Rosenberg notes, never before has it dipped below zero on a year-over-year basis without an overall contraction in the economy. Real median household income remains 7 percent lower than it was in December 2007, and it remains 3.9 percent lower than in June 2009, the official end date of the recession. Wage growth has also come to a halt. For the first time since World War II, former labor secretary Robert Reich has written, there was a decline in aggregate wages and salaries in the seven quarters after a recession, and inflation-adjusted wages for all employees fell 1.1 percent. We now have five unemployed job seekers on average vying for every job opening. Almost half of the unemployed have been looking for a job fruitlessly for over six months.
The damage to household balance sheets is 10 times as much as it was during the mid-to-late 1970s, another comparable weak period for the economy, according to Bloomberg Markets magazine. We are amid the worst private balance sheet contraction since World War II, a condition that depresses profits, asset values, and incomes—a deleveraging that is going to continue, since consumer indebtedness is still high relative to disposable income. The great fear for millions of people now must be the ever-worsening prospects for a comfortable retirement. Many of them find their debt loads are not sustainable either by incomes, which are declining in real terms, or by falling asset values.
No wonder the consumer confidence index in January, in fact, sank to 61.1 from the revised 64.8 in December. All spending intention components fell, according to the January reading of the Conference Board consumer index, including home-buying plans, appliance-buying plans, and auto intentions.
In other words, this is an economy on major life support with zero economic momentum. This reflects a growing concern about higher energy costs, the end of inventory accumulation, the slowing in capital spending, a flat trend in consumer spending, and the ongoing fiscal burden from both federal and state governments. That's not to mention the possibility of a major bump because the Europeans just cannot get their act together, so we have the danger of financial contagion and a potential slide in our exports.
No wonder voters see this as more than a recession. We will need a recovery from this recovery. We must change our public policy in a big way. As the old saying goes, "If your horse is dead, the best strategy is to dismount." There are several courses: fresh mounts, one might say, if we could find a horseman of the courage and skill of the Pony Express heroes.
One that's critical is tax reform: Broaden the base and get rid of loopholes, deductions, and credits—and the inherent corruption related to them—so as to enable lower marginal tax rates. The second is a serious program for the enhancement of human and physical capital, both crucial for sustainable long-term growth. We must have greater investment in R&D and education, particularly in math and the sciences, and in vocational skill training in community colleges. I've long advocated the creation of an infrastructure bank, marrying private and public capital for new construction and to repair what we have. The American Society of Civil Engineers has identified $2.2 trillion of investment needed over five years for water systems, dams, bridges, railroads, and other infrastructure; tolerating decay will only cost us more. In the Northeast corridor, for example, bottlenecks are created on 1-95 as trucks clog the bumper-to-bumper highway because the railroad bridge and tunnel clearances are too low for double-stacked containers. Half the cost of doing the work now would come from the multibillion-dollar savings that would result later. Third, we must address the deficit along the lines of the Bowles-Simpson plan the president ignored, or at some unpredictable point we risk the bond market treating us as it has been treating Italy and other countries with unsustainable debts.
Despair has opinion in its grip—despair about leadership, especially the no-no, party-line Congress, which has no room for an independent-minded centrist like Sen. Olympia Snowe of Maine, who recently announced her retirement. Nor does the public have the faith it had nearly four years ago in the ability of the man with the ultimate responsibility: the president. As Harry Truman said of his presidency, and he meant it, "The buck stops here."
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Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report.
Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report.
© 2009, Mortimer Zuckerman