Today’s Economist: The Current U.S. Economy: Text and Subtext

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Today’s Economist

Perspectives from expert contributors.

The International Monetary Fund just published its most recent assessment of the United States economy.  Its summary, below, is clear and incisive.  Yet, there’s another layer to all of this so I’ve added annotations — the numbers in brackets — intended to peel back the economic onion a bit, as it were.

The United States recovery has remained tepid over the last year [1], but underlying fundamentals have been gradually improving [2]. The modest growth rate of 2.2 percent in 2012 [3] reflected legacy effects from the financial crisis, fiscal deficit reduction [4], a weak external environment [5], and temporary effects of extreme weather-related events. These headwinds notwithstanding, the nature of the recovery appears to be changing. In particular, house prices and construction activity have rebounded, household balance sheets have strengthened, labor market conditions have improved, and corporate profitability and balance sheets remain strong, especially for large firms [6]. With the sizable output gap and well-anchored inflation [7] expectations keeping inflation subdued, the Fed appropriately continued to add monetary policy accommodation over the past year by increasing its asset purchases and linking the path of short-term rates to quantitative measures of economic performance, thus helping to maintain long-term rates at exceptionally low levels [8]. Overall financial conditions have eased, as risk spreads narrowed, stock market valuations surpassed their pre-crisis peak [9], and bank credit conditions gradually eased.

[1] We are stuck in a sloggy, backward-leaning L-shaped recovery: The United States economy, with considerable prodding from fiscal, financial (the bailouts), and monetary help, exited a historically deep recession in the second half of 2009, but has been growing relatively slowly since then.  In other words, there was no “bounce-back,” no V-shaped pattern, where we fall hard but quickly make up our losses.  So, why did those policy interventions help break the recession but not move growth from an L to a V?  Because they ended too soon.

[2] Whose fundamentals you talkin’ about? At times like this, there’s a risk that the economy’s doing well, except for most of the people in it.  To understand how the recovery is playing out in different people’s lives, you’ve got to ask: just whose fundamentals are improving?

[3] Current growth rates are not fast enough to put much downward pressure on the unemployment rate. When the economy grows at around 2 percent, the unemployment rate tends to stay about where it is as that’s just fast enough growth to balance the flows of people coming into the job market and cycling out of unemployment into work.  But it’s not fast enough to really make a big dent in the stock of about 20 million who are un- and underemployed.  Moreover, the I.M.F. predicts slower growth (1.9 percent) this year.

[4] Wait a minute — they said things are improving … so why slower growth!? Because of too much “fiscal deficit reduction.” Our policy makers may not be the austerions that are whacking away at European economies right now, but we too have reduced government spending too quickly, far more so, as the Fed governor Janet Yellen points out, than in past recoveries.  Basically, the public sector handed the growth baton to the private sector before it was ready to run with it.

[5] The “weak external environment” refers to slower growth in some of our export markets, like Europe, which absorbs about 20 percent of our exports.  But the problem runs deeper: our persistent trade deficits have essentially exported demand and jobs for years, often to countries that manage their currencies to maintain a price advantage over us.  Policy makers who want to reverse that need to address this currency issue if we are to make serious progress on increasing net exports.

[6] All true, and all helpful developments, especially the housing part, but there’s a large imbalance between improving labor market conditions and corporate profitability.  When the lightly unionized American job market is too slack, as it’s been for years now, low- and middle-wage workers have too little bargaining power to claim much of the growth they’re helping to create.  It’s a very different story for large multinationals who can trot the globe seeking profits (and tax shelters).  In fact, the compensation share of national income is at a 48-year low, the profit share at an all-time high.

[7] “Well-anchored inflation?”  Inflation is running at around a measly 1 percent, in no small part because of the growth slog and absence of labor market pressures.  True [8], this should keep the Fed in the easing game for a while, and that in turn could perhaps calm excessively skittish equity markets (they’re worried the Fed will begin to “taper” its bond buying program).  But faster inflation right now is less a function of expectations and more of weak demand and stagnating wages.  A bit faster price growth would thus be a welcome sign.

[9] Stock market valuations way up. Though a rising stock market benefits some in the broad middle class, mostly through retirement and pension savings, the vast majority of its gains go to the wealthiest (80 percent of the value of the market is held by the richest 10 percent of households).  It’s actually very simple to describe what’s wrong here: since the recovery began, adjusted for inflation the Standard Poor’s 500-stock index is up 57 percent while median household income is down 5 percent.

The picture painted in broad strokes by the I.M.F. is correct and not at all without hope.  As they say, things are improving, albeit too slowly.  But in every case, we could be doing better were it not for policy mistakes, ones that are having profound and lasting impacts on the living standards of working families.  In this regard, it’s important to peel back the economic onion, even if it makes you tear up.

Article source: http://economix.blogs.nytimes.com/2013/06/17/the-current-u-s-economy-text-and-subtext/?partner=rss&emc=rss