Signs of Economic Discovery Haven't Trickled Down
Detroit Free Press, December 5, 2003
Knight-Ridder Tribune Information Services - December 3, 2003
The Express Times (Easton, Pennsylvania) - December 5, 2003
Salt Lake City Tribune - December 5, 2003
The San Diego Union-Tribune - December 5, 2003
Duluth News Tribune - Dec. 13, 2003
How's the economy doing? This is shaping up to be the number one question affecting President George W. Bush's re-election bid. If you turn on the TV or pick up the newspaper, it looks like the economy is picking up steam, roaring out of a long slump just in time for the election season.
But then you turn to your neighbors and friends, and they say it still feels like a recession. Part of this disconnect is because most people get their income from the labor market, not the stock market. The Dow is up 15 percent for the year, but unemployment is unchanged and wages are stagnant.
Business reporting puts a lot of emphasis on the stock market, and sometimes even more esoteric indicators such as quarterly GDP growth or the Institute for Supply Management Manufacturing Index. (Both have recently taken big jumps.)
But the vast majority of Americans still own little or no stock, even including retirement accounts. So the growth of the economy won't help them until it shows up in rising employment or wages.
But the Republicans got a lot of mileage out of that 8.2 percent growth in the third quarter, "the fastest in 19 years." I was a guest recently on a right-wing talk radio show in Boston, and the host kept coming back to that. As far as he was concerned, this was incontestable proof that the sun was shining brightly on the U.S. economy, and the Republican tax cuts had worked.
I tried to point out that the economy had suffered a net loss of 2.3 million jobs since January of 2001, but he dismissed this as just liberal gloom-and-doom. But one quarter of fast growth won't reverse this kind of damage, and growth for the fourth quarter (ending this month) will probably be about a third of the last one.
Most tellingly, we can see the terrible underperformance of the economy by simply comparing it with previous economic recoveries. It is now a full two years since the recession of 2001 ended. Normally our economy creates millions of jobs when it recovers from a recession. The last recession -- the one that cost George W. Bush's father his job -- was considered exceptional in that it was followed by a "jobless recovery."
But even that "jobless recovery" had produced a net gain of 1.4 million jobs by the time two years had passed. The two previous economic recoveries (1982 and 1975) produced 7.2 million and 4.7 million jobs, respectively, in their first two years. We are now facing the unprecedented phenomenon of a "job loss" recovery: two years into the rebound, a net loss of 768 thousand jobs.
The bleeding has stopped in the last three months, with modest job growth. But we need job gains of more than 150,000 each month just to keep the unemployment rate from rising.
The tax cut did stimulate the economy -- we saw the effect in July and August, which gave us Mr. Bush's big quarter. A much bigger stimulus was provided by mortgage refinancing, which pumped more than $200 billion into the economy over the previous year. This is because households use the refinancing to borrow against their mortgage (adding to their record levels of debt).
But both of those sources of stimulus have run their course, and consumption was already flat in September and again in October. And there are serious clouds over the horizon. The biggest is an estimated $3 trillion bubble in housing prices, which when it breaks could have an effect comparable to the collapse of the stock market bubble in 2000. A reminder: it was the bursting of the stock market bubble that caused the 2001 recession and our current "job loss" recovery.
Of course, President Bush cannot be blamed for the stock market bubble -- it was bi-partisan negligence that allowed it to grow to such outlandish proportions. But he took advantage of the recession that followed to win approval of enormous tax cuts, mostly for the wealthy.
These tax cuts have provided minimal stimulus to the economy, while costing trillions in lost future revenue -- making it politically more difficult to counteract the economy's weakness. This will prove to be a costly mistake, and the electorate may hold him accountable for it.