Politics & Policy

Getting Used to Anemic Growth

Job fair in San Jose, Calif., in 2011.
The recovery limps along, and Obamanomics is only partly to blame.

If the government shutdown really did slow the U.S. economy, it was an encumbrance on an already lethargic growth rate. New data suggest real GDP grew just 1.8 percent or so the past three months. For the year, says Goldman Sachs, it’s shaping up to be an anemic 1.6 percent.

With economic growth so paltry, it’s no wonder job gains are slight. Last week’s three-week-delayed September employment report showed only 148,000 net new jobs created last month. And for the third quarter overall, monthly job growth averaged just 143,000 — a deceleration from 209,000 jobs a month in the fourth quarter of 2012, 207,000 in the first quarter of this year, and 182,000 in the second quarter. At recent trend, it would take until roughly 2022 before the job market returned to pre–Great Recession levels. So, pretty much, never.

#ad#It’s tempting for conservatives to entirely blame the Not-So-Great Recovery on Obamanomics. But repealing Obamacare, Dodd-Frank, and the recent high-income tax increases — while certainty helpful in some respects — would not a boom make.

First, the Great Recession was hardly a typical downturn, even beyond its severity and Wall Street’s collapse. The current recovery is slower than every preceding U.S. recession with a financial crisis. In a new paper, former Federal Reserve economist and current Hoover Institution fellow Michael Bordo fingers “the unprecedented housing bust that accompanied the financial crisis” as the culprit. Residential investment is not by itself a big chunk of national spending, but it is closely linked to the purchase of consumer durables and other housing-sensitive sectors, which stimulates consumption, Bordo explains.

Second, the Federal Reserve’s discretionary and erratic bond-buying strategy has done an insufficient job of meeting money demand. People are still pretty cautious four years after the Great Recession officially ended. Economist David Beckworth points to, for example, both low bond yields and the continued elevated level of liquid assets that consumers have been holding as signs of that caution. His fellow market monetarist economist Scott Sumner says that with total spending in the economy still far below its pre-recession trend, the Fed needs to be looser. “We need to return to normal [nominal GDP growth], and normal interest rates, and you do that with a more expansionary monetary policy,” he recently wrote on his blog. If the Bernanke Fed were explicitly targeting nominal GDP, it might get a much bigger bang for its existing bond buys by lifting business and consumer growth expectations.

Third, along with the monetary uncertainty, Washington has created fiscal uncertainty. Macroeconomic Advisers finds that since late 2009, uncertainty created by America’s crisis-driven fiscal policy has lowered GDP growth by 0.3 percentage points per year and raised the unemployment rate in 2013 by 0.6 percentage points, equivalent to 900,000 lost jobs. Stan Veuger of the American Enterprise Institute notes that MA’s analysis merely quantifies the wisdom of James Madison, who wrote in The Federalist No. 62: “Great injury results from an unstable government. The want of confidence in the public councils damps every useful undertaking.”

Fourth, there might be a deeper problem with the U.S. economy. We had 18 quarters of 4 percent growth or greater in 1980s, and then another 18 in the 1990s, But we’ve have had just six since then. What’s more, the past three recessions have each been followed by jobless recoveries. Perhaps the economy’s growth potential isn’t what it used to be — this is actually widely considered a possibility from Wall Street to Washington — while at the same time technology is really beginning to thin the middle level of the U.S labor force. While America remains an innovation powerhouse, maybe it’s weighted too much toward efficiency innovation that replaces men with machines and too little toward the sort that creates new industries and jobs. And even if the economy creates more game-changing innovation, the resulting high-wage jobs are likely to require technologically sophisticated workers. Economist Tyler Cowen, for one, thinks most of the U.S. labor force won’t ever qualify.

And what is Washington’s pro-growth, pro-job middle-class agenda? I mean, what is it — beyond battling over “glitchy” insurance exchanges and the debt ceiling? Tweet me @jimpethokoukis if you hear of one.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

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