The State of the Union Is Scary

Politicians know there are problems, but still nothing gets done.

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The state of our union is scary.

The unemployed know it, and have known it with piercing bitterness for too many years. Nearly half of the American labor force without a four-year college degree is not working.

Families know it, because in real terms the wages breadwinners are bringing home are pretty much where they were 40 years ago.

The 47 million Americans on food stamps know it.

Chief executives know it. They see the disappointing numbers for capital investment, which mean bleaker prospects for their companies – and fewer jobs.

Economists and historians know it, and are puzzled why, despite all the fiscal pump priming, we are in the midst of the weakest recovery since World War II.

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

Foreign observers know it, though given their own problems in Europe, China and Japan, they still hope the train arriving at platform No. 1 is the same American locomotive that pulled economies shattered by World War II to record prosperity.

Politicians of both parties know it very well, but they also know we have impasse. Nothing gets done.

The state of the union is scary.

The American economy has little steam. Real annual GDP growth, adjusted for inflation, has run only around 1.3 percent over the last eight years. Some, mainly in the Republican party, were worried that the monetary and fiscal stimulus would be too much, that the economy would overheat into inflation. Hardly! It is only moderately larger – by 5.5 percent – than it was at its peak more than five years ago. As John Makin, an economist and resident scholar at the American Enterprise Institute wrote earlier this month, "After the 2008 financial crisis, U.S. GDP per capita actually fell, at an average rate of -1 percent year-over-year, from January 2009 to September 2013."

Indeed, so nearly comatose is the patient that a leading opponent of outgoing Federal Reserve Chairman Ben Bernanke's monetary easing, Narayana Kocherlakota, president of the notoriously cagey Federal Reserve Bank of Minneapolis, has changed his mind. Last week he told The New York Times he now favors stronger action, just as the Fed is poised to do less.

Who is right?

[See a collection of political cartoons on the budget and deficit.]

Makin reckons that since mid-2011, the economy has been growing at an average rate of about 2 percent. Not terrible, but still a weak recovery, with no assurance of continuity. It is disturbing that we are seeing a fall in private sector spending on items such as plant, machinery and equipment. Those investments have gone through the lowest five-year growth period in six decades; the 6 percent average real growth rate between 2003 and 2007 has shrunk to 2.7 percent. The Financial Times cited research last week showing that investment analysts believe business capital spending in the U.S. will be down to 1.2 percent for this year. In fact, durable goods orders in December fell by 4.3 percent. This is especially worrisome, because that spending is the best of all job multipliers. A weak investment program equals weak employment and growth.

All this suggests that President Obama, in his Tuesday speech, was too sanguine about a breakout for the economy in 2014. The 74,000 increase in non-farm payroll employment for December was disappointing, the worst monthly figure in three years. No postrecession rebound in industrial output has been this slow since 1950. More than 50 months into the recovery, the U.S. economy has not broken the pattern of sluggish to moderate growth. What we experienced was less "a recession" than a "contained depression."

The state of the economy is scary.

Consumers are glum about the labor market. Their assessment of the risk of losing a job during the next five years has lately been at a mean of around 18 or 19 percent, according to the University of Michigan consumer sentiment index. It is no comfort that a majority of Americans (53 percent in the Quinnipiac University poll released last week) don't believe the Obama administration is competent to turn things around.

The unemployment numbers are grim. According to the Bureau of Labor Statistics, out of a total of 144 million workers, roughly 27.8 million are now part-timers and something akin to 13 million are either completely unemployed or have given up looking for a job. This is a dangerous level of job weakness. Yes, the unemployment rate appears to have dropped from a peak of 10 percent-plus in late 2009 to 6.7 percent at present, but more than anything else, that reflects a decline in the share of the working-age population working or looking for work. This past year, that labor participation rate hit a 35-year low of 63.2 percent. That 6.7 percent unemployment rate would be a lot higher if it also reflected those who have simply dropped out. It is particularly distressing that the participation rate has dropped most noticeably for men and women in their prime earning years, between the ages of 25 and 54, The Economist recently observed, and is up only slightly for those 55 and over.

[Check out our editorial cartoons on President Obama.]

The question is why. The Economist pointed out that more generous unemployment benefits tend to increase the participation rate, since to qualify workers must be looking for work. But there's a telling depressant on labor participation in disability insurance claims. Qualified applicants must generally demonstrate they cannot work. "Between 2007 and 2012," the article noted, "the number of applicants for DI shot up from 11.2 per 1,000 working-age people to 14. ... The proportion of working-age adults on DI has risen from 1.3 percent in 1970 to 4.6 percent in 2013."

How do we get out of this? Some economists, including Harvard's Lawrence Summers, a former secretary of the treasury, believe the financial crisis catapulted us into a new era of "secular stagnation" in which growth will remain below normal unless there are innovative policy measures to reboot sustainable growth.

What might they be? Fiscal policy today is in a reduction mode, manifested by a shrinking fiscal stimulus. Monetary policy seems to have reached its limits as a restorative. The money may be there, but demand is not. How can it be, given prolonged unemployment and stagnant wages? Let's at least do a little to sustain demand and morale by passing a modest extension of unemployment benefits. Let's do a lot to sustain our assets by investing in our national infrastructure, which everyone now justifiably describes as "crumbling." We gave the world flight. Now we fail to give ourselves decent airports where we need them and air traffic systems second to none. The long-term benefits are incalculable.

The overarching dilemma is that we are out of sync with the technological changes we have fostered. The age of the chip and the robot requires workers with different skills and levels of education than the electro-mechanical era did. Alas, Makin noted, we don't fully understand how technology will generate capital investment, boost labor productivity and raise employment growth.

[Read the U.S. News debate: Should the Federal Reserve keep interest rates low?]

Even so, it is obvious that we must educate more Americans in engineering and technology, and add to their numbers by welcoming people from abroad who are trained in the STEM disciplines (science, technology, engineering and math). That means no more debate about restoring our H-1B admissions program. Let's just do it, and get the numbers back to the highest levels of earlier years, namely 195,000 visas per year. A high proportion of these immigrants start new businesses, another source of strength we must nurture. Startups remain the main source of new jobs in our economy, averaging around 3 million a year.

Other policy options? Tax reform and deregulation. Heaven knows, here's another policy area where we've talked the talk but haven't walked the walk. But we are even now not secure from another round of sterile ideological confrontation when the federal debt ceiling comes up next month.

All of this will require bipartisan cooperation at the highest levels of our government, sadly lacking for so long. Surely, the politicians can summon the will to vet and enact, say, just half of the straightforward elements of a growth agenda. Then we might justifiably say: The state of the union is stronger.