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The 1.1% Wake-Up Call
The unemployment rate dropped to 8.3% in January — on the face of it, good news, celebrated by the media. But on the same day that the jobs figures were announced, the director of the Congressional Budget Office, Douglas Elmendorf, predicted in testimony that U.S. economic growth will be only 2% this year and then decline to a measly 1.1% in 2013. Only a year ago, the CBO was projecting 2.8% in 2012 and 3.5% in 2013. CBO’s projections, which draw on a consensus of economists, are frequently off the mark, but these forecasts are truly disturbing — and have merited little notice in comparison with the happy monthly employment figures. Growth, as expressed by the year-to-year change in real Gross Domestic Product, the sum of goods and services, is the most significant indicator of how an economy is performing. If the economy is growing, unemployment falls — and so does the expected debt. A one-percentage-point increase in GDP in just one year reduces the predicted federal debt by $750 billion over the next 10 years, as tax revenues rise and social-welfare spending falls. And, of course, lower growth means a correspondingly higher debt. In its new forecast, the CBO is predicting that unemployment will rise this year to 8.9% and then next year to 9.2%, which is the level of about a year ago. In other words, the decline we’ve seen lately will be fleeting. And the CBO now forecasts another trillion-dollar deficit in 2012 and an increase of about 12% in the 2013 deficit that was forecast just five months ago. What’s gone wrong? In his written testimony to Congress, Elmendorf said, “Considerable slack remains in the labor market, mainly as a consequence of continued weakness in demand for goods and services.” Nothing new, really. In four years since the beginning of the recession and two and a half years after it officially ended, the economy still hasn’t recovered. Since World War II, you can draw a straight, upward slanting line that describes the course of American GDP. From afar, it seems to rise inexorably. Closer up, you can see the effects of 10 recessions. The line drops a bit, then quickly goes back up to the rising trend. But for this recession, number 11, the line falls but, so far, hasn’t gotten back to trend. The CBO projects that day won’t come until 2016. So, not only is this the longest recession since the Great Depression, it is the most reluctant to recover. Is there something different about this recession? Many economists think so, most articulately, Carmen Rinehart and Kenneth Rogoff. It’s a recession brought about by a severe financial crisis, in this case caused by a housing bubble. We won’t be out of the woods until Americans, including their government, finish a process of de-leveraging, or reducing high levels of debt, which isn’t easy because the immediate remedy for the crisis was federal borrowing. A normal recession, by contrast, happens when the Fed raises interest rates to choke off an overheating economy. Business activity falls, and, as demand for borrowing declines, rates fall too — and that decline itself triggers a recovery. But whether this period is really different or not, the economy will eventually get back on a sustainable course. The real problem is that the course is not very encouraging. The CBO sees a catch-up period of high growth between 2014 and 2016 (this is the blessed time that the CBO keeps pushing further and further out), then a gradual decline to a sustainable growth rate of just 2.4% starting in 2020. And that long-term sustainable rate is the big problem. It is nearly a full point lower than the average of 3.3% between the end of World War II and the start of the last recession. A full point is a lot, and, even taking into account the forecast of an aging U.S. population (which means fewer workers supporting more retirees), it is unnecessary. A 2.4% rate of growth means reduced opportunity and prosperity, and a lower standard of living that hard-working Americans desire and deserve. This is our great challenge — to raise U.S. growth to at least the post-war level and, even better, to an attainable 4% annually. How to do it? More sensible government policies that create an environment in which enterprise can thrive: growth-oriented policies for taxes, immigration, trade, and regulation; changes that will enhance entrepreneurship and increase student achievement; reductions in government spending excesses and increases in research and development. The answers exist. The problem is that the right question is not being asked. That question is both simple and profound: How can we grow? If we ever needed a reminder of the urgency of answering that question, we have it now from the CBO in that horrifying figure: 1.1% in 2013. What we need, instead, is 4% for a long, long time.
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