America's Economy Not Coming Back
Don't believe the good-news pundits who say America's economy is coming back. Reihan Salam says we're heading into a decade-long economic buzz saw.
America's economic gloom is lifting! The market for pessimism has bottomed out! Daniel Gross of Newsweek and Slate and Mike Dorning of Bloomberg BusinessWeek have written big features celebrating the comeback of the U.S. economy, and at least some people are buying it, not to mention buying piles of shiny new consumer goods.
Last week J.P. Morgan issued a report making the case that the global upturn has legs thanks to an increase in business spending and hiring. Strong growth in emerging markets is fueling global demand. Global inventory restocking hasn't even begun to take off. Corporate earnings for U.S. firms are surging. Despite a few cautionary notes, one gets the impression that Wall Street fully expects a sustained recovery. It helps that the stock market is steadily climbing, and average hourly wages and aggregate weekly hours are climbing as well, a sign that more employment gains are on the way. Big mass-market retailers, many of which had succumbed to wrist-slashing despair as recently as a year ago, are reporting stronger earnings. And on Good Morning America, Treasury Secretary Tim Geithner declared Thursday morning that the economy is “absolutely stronger,” pointing to sizzling gains in the technology sector and solid growth in manufacturing.
So the worst is behind us, right? Nope, not by a longshot.
Over the weekend, Christina Romer, the distinguished chair of President Obama's Council of Economic Advisers, gave a speech at Princeton in which she argued that the central economic problem facing the country remains a lack of aggregate demand, a problem that could be solved through further injections of federal dollars. Throughout her speech, Romer pressed the point that a 9.7 percent unemployment rate is unacceptably high and that we can't just sit back and accept it without taking aggressive government action. Essentially, Romer was arguing that we must not accept high unemployment as "the new normal."
"Behind this fatalism," Romer suggested, "there seems to be a view that perhaps the high unemployment reflects structural changes or other factors not easily amenable to correction." It's hardly surprising that Christina Romer would make a strong case for the president's economic agenda. She is, after all, one of its architects, and fatalism isn’t good politics. But—at the risk of playing the economic pessimist—what if it really is true that we're dealing with structural changes that are not easily amenable to correction?
There is at least one structural change that is undeniable: namely that there's been a delinkage between corporate profits and the health of the U.S. labor market. U.S.-based multinationals now look to emerging market economies as engines of growth. At home, these firms continue to aggressively cut costs and produce more with fewer workers. This has meant robust productivity increases, a sign of good things to come. But hiring and expansion is happening where the breakneck growth is happening, and that is not in the United States.
Given the expansion in economic output, we'd normally have seen a far bigger increase in employment, not least because the United States has flexible labor markets that make it relatively easy to hire on a part-time basis. Nevertheless, employers keep squeezing more productivity out of their existing workforce. Part of the story could be that employers are willing to hire at somewhat lower wages, but would-be workers remain reluctant to accept sharp pay cuts. At least some employers, buffeted by promises of tax credits for new hires and other scattershot policy shifts, are treading lightly for fear that they'll soon be subject to punishing taxes and fees, or that they'll miss out on forthcoming federal subsidies if they act too soon.
So you have to wonder about the latest round of economic cheerleading, a lot of which defies comprehension. In Newsweek, Daniel Gross pointed to longer-term trends, painting an attractive vision of the future in which we move beyond McMansions and Hummers and toward "new commercial infrastructures and industrial ecosystems that incubate and propel growth," like new networks of electric vehicles and a high-tech energy grid and much else besides.
But one could just as easily argue that we've been furiously spending taxpayer dollars propping up the McMansion-and-Hummer economy. To protect homeowners, we've launched an extraordinary series of interventions designed to buttress housing prices, an approach that effectively transfers wealth from those who rent to those who own. Collapsing housing prices could prove a boon for less-affluent households or cautious investors who were reluctant to buy at the top of the market. That can't help unless we accept that housing prices can and should collapse, even if that hurts key constituencies in the short term. And the same goes for efforts to keep the domestic automotive industry on life support.
If anything, Gross seems to be engaging in wishful thinking, painting a portrait of the economy that would be wonderful if true. "In the past two years," Gross writes, "the old policy of subsidizing housing and Wall Street has been replaced by a new one that seeks to boost national operating income through efficiency." In fact, almost the opposite is true. The old policy is alive and well, and there are many in both parties who are calling for doubling down on a McMansion-and-Hummer pseudo-recovery. And if Wall Street is less subsidized now than it was before the death of Lehman, I will eat my hat.
We are propping up the most rotten sectors of the economy and diverting talent that would otherwise shift into the new interrelated systems that are slowly emerging—and this emergence will prove very slow indeed once the inevitable tax burden required to prop up aging yet politically powerful sectors hits. One can hope, like Gross, that those new commercial infrastructures and industrial ecosystems that propel growth will take shape here at home. They could just as easily emerge in China or India or, for that matter, Canada, a country that has pursued more sustainable fiscal policies.
Mike Dorning of Bloomberg BusinessWeek focused more narrowly on the success of the president's stimulus package. But it's hardly surprising that a massive debt-financed stimulus has led to an uptick in economic activity. The question is whether or not it will enhance long-term growth in light of the impact of a heavy public debt burden going forward. Has it moved the economy in the right direction by facilitating the liquidation of bad bets made during the housing boom, a process that might dampen GDP expansion in the short term while enhancing long-term growth? That is an entirely different question. As Jeffrey Sachs has argued, the United States has been engaging in extreme policy swings throughout the Greenspan era, veering from recession to bubble and back again. By running a double-digit budget deficit, we've severely limited our options in the face of the next economic crisis, all without making the painful adjustments—to tax rates, to spending, to the bloated financial sector—that would make another crisis less likely.
That’s my case for economic pessimism. I sure hope I'm wrong. But I get the distinct impression that we're walking into a decade-long buzzsaw.
Reihan Salam is a policy adviser at e21 and a fellow at the New America Foundation.