The Grand Illusion

The Obama administration is more inclined to public relations than hard-headed pragmatism in dealing with unemployment.

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Which way are we going? The stock market has revived, though it still is off a high in real terms. There's suddenly good news about housing demand, which is showing signs of life after six years of stagnation. Yet Federal Reserve Chairman Ben Bernanke warns that the package of fiscal cutbacks – the fiscal cliff, sequester, and other cuts – is set to reduce growth by 1.5 percentage points. He calls that "very significant" and adds that "job creation is slower than it would be otherwise." This is the key to where we are. New research from the Brookings Institution concludes that rising inequality in the United States is not something that will vanish with a real recovery. It is here to stay, a reflection of an increasingly calcified society and a whole crisis in itself.

The present phase of our Great Recession might be called the Grand Illusion, because all the happy talk and statistics that go with it, especially on the key indicator of jobs, give a rosier picture than the facts justify. We are not really advancing. We are, by comparison with earlier recessions, going backward. We have a $1.3 trillion budget deficit. And despite the most stimulative fiscal policy in our history and the most stimulative monetary policy, with a trillion-dollar expansion to our money supply, our economy over the last three years has been declining or stagnant. From growth in annual GDP of 2.4 percent 2010, we bumped down to only 1.8 percent in 2011 and were still down at 2.2 percent in 2012. The cumulative growth for the last 12 quarters was just 6.2 percent, less than half the 15.2 percent average after previous recessions over a similar period of time. It is the slowest growth rate of all the 11 post-World War II recessions.

What has gone wrong? There seems to be a weakness in the investment of private capital. Today, corporate spending on investments is the weakest it has been in six decades. The billions invested in the Internet, spreading its application and comingling the technology with labor, boosted multifactor productivity but, as David Rosenberg of wealth-management firm Gluskin Sheff points out, most of that occurred several years ago. As he has written, a capex-led business recovery that breeds sustained productivity growth and decent job creation is what underscores the best and longest economic expansions since the end of WWII.

[See a collection of political cartoons on the economy.]

Anemic growth looks likely to continue because of various downers implicit in Bernanke's caution. Sequestration will take $600 billion of government expenditures out of the economy over the next 10 years. Payroll taxes up 2 percent hit about 160 million workers and will drain $110 billion in aggregate demand. The Obama health care tax will be a $30 billion-plus drag. The surge in gasoline prices by some 50 cents recently may be temporary, as Bernanke suggests, but meanwhile represents another $65 billion of consumer cash flow. Conservatively, these nasties add up to roughly a 2 percent hit to baseline GDP growth when we are barely able to muster 2 percent growth.

Then there's housing. Yes, it is nice to see a surge in some areas. But millions of homes are owned by banks or are in the foreclosure process. The New York Times noted last week that the home where Bernanke was raised, in a small town in South Carolina whose unemployment rate was recently 15 percent, had just been foreclosed upon the last time he visited, and one of his relatives was unemployed. Talk about symbolism. Single-family home sales and starts are barely off their depressed levels, and have only recouped 17 percent of recession losses. The housing market is mostly driven by investor-based, rental-related, multifamily buying activity, reflected in the fact that multiple housing units have reversed more than 70 percent of the damage they sustained from the recession.

Our economy's most important player, the consumer, offers no relief from this cascade of downers. About 70 percent of national expenditures come from consumers, but their confidence level has dropped to only 58.6 percent. Restaurant traffic, one of the most reliable trend indicators, has slipped to a three-year low. In fact, the only reason that real consumer spending is not shown as contracting is because personal savings rates since November 2007 have declined from 6.4 percent to around 2.5 percent of incomes.