Economic Russian Roulette In the American Political System
The Article: Rational Irrationality: G.D.P. Shocker: U.S. on Verge of Double-Dip Recession by John Cassidy of the New Yorker.
The Text: Amid all the absurd posturing over raising the debt ceiling comes some real news—and it’s very bad. According to new government figures, the economy has hardly grown at all in 2011. The recovery that began in early 2009 is now officially stalled. Some economists will quibble, but I think it is fair to say that the dreaded double-dip recession is at hand.
However it is labelled, the economic relapse is sure to have a big impact on politics. In the immediate term, it will increase pressure on Congress to raise the debt ceiling so the U.S. government can move on to more important issues, such as creating jobs. There is now the alarming prospect of the unemployment rate heading back to double figures over the next few months. It hardly needs saying that this would create problems for President Obama, who has staked his credibility on the economic recovery that began in mid-2009.
When healthy, the American economy grows at an annual rate of close to three per cent. The Commerce Department’s latest report on the gross domestic product (pdf) shows that between April and June, it expanded at an annual rate of 1.3 per cent, and between January and March it grew at an annual rate of just 0.4 per cent. The first-quarter figure is particularly stunning. Previously, the Commerce Department had estimated growth in the period at 1.9 per cent. What is to prevent a similar downward revision to the second-quarter figures? Nobody can say.
Consumer spending, which is the driving force of the American economy—it makes up more than two thirds of G.D.P.—has stalled badly. After expanding at an annual rate of more than two per cent for the previous year and a half, it was essentially flat in the second quarter. Unless consumers spend more readily in the second half of the year, there is no prospect of an economic rebound. But with gas prices still high, unemployment ticking up again, and their elected representatives in Washington paralyzed, it seems unlikely that American families will be flocking back to the malls anytime soon.
To the extent that there is any growth, business investment and exports are providing it. But these items are too small to offset a slump in consumer spending and cutbacks in government expenditures. (Tea Party activists and other fiscal hawks take note: the Commerce Department report provides official confirmation that spending cuts, particularly at the state and local level, are acting as a drag on the economy.)
In one sense, the new G.D.P. figures are even worse than they seem. Bear in mind that they are all annualized. This means the government statisticians take the actual growth rate in the quarter and (roughly speaking) multiply it by four. Reversing the process (dividing by four) reveals that the economy expanded by just 0.1 percent in the first quarter and by roughly 0.3 per cent in the second quarter. These figures are so small as to be trivial.
So are we in another recession? That depends on how the word is defined. One simple definition is that a recession is two or more quarters of negative G.D.P. growth. By that standard, this is not yet another recession. It is what economists call a “growth recession”—i.e., a period when the economy expands but at a rate that is too slow to create jobs and bring down unemployment.
The two-negative-quarters-of-growth definition is clear and unambiguous: in the past, I have expressed support for it on those grounds. However, the National Bureau of Economic Research’s Business Cycle Dating Committee, which is the official arbiter in these matters, prefers a broader and fuzzier definition. Here is what it says about recessions: “During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.”
But what is “economic activity”? Back to the N.B.E.R.: “The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as retail sales and the Federal Reserve’s index of industrial production.”
On the basis of the N.B.E.R.’s definition, what we are going through looks suspiciously like the beginnings of another recession. Payrolls, after growing at a monthly rate of more than two hundred thousand jobs earlier in the year, have essentially been flat since the end of April, and the unemployment rate has crept up from 8.8 per cent to 9.2 per cent. The sharp falloff in job growth was a development that very few economists predicted.
Retail sales hardly grew at all in June. Wall Street analysts who had been predicting growth of close to three per cent for the rest of the year are now busy trimming their estimates. Industrial production, the other item that the N.B.E.R. watches closely, has also been showing weakness. The Fed’s index of industrial production declined slightly in April and May, before rising slightly in June. Manufacturing, the biggest component of industrial production, had its weakest quarter since the previous recession ended in mid-2009.
We can debate the meaning of the word “recession” all day. The fact is that the official statistics have now caught up with what many ordinary Americans have been saying to each other all along. Five years after the bursting of the housing bubble, the country is still living through tough times. The economic “recovery” is so weak as to be virtually nonexistent.
Once the debt-ceiling impasse is resolved—and I still believe it will be resolved—the President needs to do something he should have done months ago: go all out for a meaningful jobs program. This could be in the form of subsidies to employers, job sharing, public-works projects, or targeted tax cuts. If the Republicans resist, as they surely will, he can portray them as do-nothings more concerned with ideological posturing (c.f. the debt-ceiling talks) than getting people back to work.
Over to you, Mr. President. Time is fast running out…
