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Not Out of the Woods

Recent unemployment figures and a scattering of other data have led many economists and policy makers to conclude that, at long last, the U.S. is...

Recent unemployment figures and a scattering of other data have led many economists and policy makers to conclude that, at long last, the U.S. is recovering from a terrible recession. The Dow Jones Industrial Average, considered a predictor of future growth, crossed the 13,000 mark for the first time since May 2008, GDP for the fourth quarter was revised upward to 3 percent, and consumer confidence jumped in February to the highest level in a year. Perhaps most dramatically, the price of gold dropped nearly $100 an ounce on Wednesday, which some analysts interpreted as a indication that the economy is doing so well that the Fed may revise its easy-money policies, thus pushing up interest rates. Higher rates may mean that investors will abandon gold for assets that pay income, like bonds and dividend stocks. The economy is definitely getting better in the very short term, but to call this recovery anemic is the understatement of the century. Some perspective is necessary, and typically the worse the recession, the stronger the recovery. History shows that in past declines GDP fell below its trend-line growth of 3.5 percent, but, after a few years at a higher level, it settled back to the average. As Jim Grant pointed out in the Wall Street Journal: “The Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1 percent, 9.3 percent, 8.1 percent, 8.5 percent, 8.0 percent and 7.1 percent. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5 percent.” Compare our recent growth rates. Yes, we made it to 3 percent for the final quarter of 2011, but growth for the year was just 1.7 percent. The bipartisan Congressional Budget Office is predicting 2 percent for the full year 2012 and just 1.1 percent for 2013.

There are a number of reasons for this gloomy prospect, but let me list just one: The U.S. budget deficit is 8.7 percent of GDP. That is the third-worst among the 42 countries tracked weekly by The Economist magazine. Only two countries – Greece and Egypt – outdo us. The U.S. economy will not truly recover – and more important, will not truly reach the sustainable level of 4 percent growth that’s needed for opportunity and prosperity – unless policies change. The lesson of the past few years is that policy matters. Specifically, we need policies that promote growth – which means that government has to establish an environment where entrepreneurs can start companies, where established businesses can expand, where individuals have incentives to enhance their skills, and where investors can feel some confidence when they take risks. When numbers are getting better, the urge to complacency is hard to resist. But the truth is that one big reason that consumers are buying more is that they have bought so little in the recent past. The average age of a car on the road in the United States is 11.1 years, a record. At some point, you have to buy a new car. Americans are not out of the woods. We are still wandering around, deep inside them. What we all need now is a growth map to get out.

This post was written by James K. Glassman, Founding Executive Director of the George W. Bush Institute.
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