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Sunday, June 3, 2012

An Economy Built to Stall

With a third slowdown in three years, maybe the problem is the policies.

Well, this week makes it official. The weakest economic recovery since World War II has become weaker still, sinking into a spring slowdown for the third year in a row. Are we finally ready to debate a change in the policies that have led to this pass?

On Thursday the government reported that growth in the first quarter was 1.9%, even weaker than the 2.2% initial estimate. Then Friday delivered the third slower jobs report in a row, which qualifies as a depressing trend. Employers created only 69,000 net new jobs in May, and April's total was revised down to 77,000 jobs. Stocks were crushed in the backwash.

The jobless rate of 8.2% marks more than three years of unemployment at or above 8%, despite an economy that ostensibly emerged from recession in July 2009. Few industries outside of manufacturing (up 12,000 in May and up by a robust one-half million since January 2010), transportation and health care saw job growth.

The rare good news is that the overall labor market expanded with 642,000 new entrants, and the labor force participation rate rose to 63.8% from 63.6% in April. This means that more workers have re-entered the job market, perhaps because they believe they can find a job or because their 99 weeks of jobless benefits have finally run out. The bad news is that 63.8% is still about two percentage points—about three million fewer workers—below the modern norm.

Even worse is the news that hours worked declined slightly, hourly earnings were up only 0.1%, and hourly earnings on a year to year basis are up a meager 1.7%. All of this means that income growth after inflation is stagnant.

On Friday the White House blamed the third slowdown of its four-year term on Republicans for blocking the President's policies, but what policies are they talking about? In his first two years in office, Democrats gave Mr. Obama everything he wanted, save for cap and trade and union card-check, which would have done even more harm to job creation. They passed stimulus, ObamaCare, multiple housing bailouts, Dodd-Frank and more.

Even after Republicans took the House, they gave Mr. Obama the payroll tax holiday he demanded first for 2011 and again for 2012. Far from some new fiscal "austerity," overall federal spending hasn't declined. Meanwhile, the Federal Reserve has delivered monetary stimulus after stimulus—QE I, QE II, Operation Twist, and 42 months of near-zero interest rates with the promise of 30 months more.

Mr. Obama has had the freest run of policy of any President since LBJ. So maybe the problem is the policies.

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