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Gloomy, Gloomier, or Gloomiest

Irwin M. Stelzer

This week I offer a rather narrow range of choice of scenarios: gloomy, gloomier, and gloomiest, leavened only with a brighter after thought. The merely gloomy forecasts anticipate unsatisfactory growth but no recession. Analysts of this view advance three arguments.

First, we are living through still another summer of our discontent, those months in which the growth engine of the U.S. economy inexplicably takes a vacation before returning to work. Second, there are signs of strength in the economy. The housing sector seems to be recovering, although with stumbles along the way. Good earnings reports from such as Boeing and Caterpillar prove that there are some signs of bright amid corporate gloom. Led by such stellar performers, it is not beyond imagining that the economy will bumble along, growing at 2 percent later this year and into 2013.

Third, the monetary policy gurus at the Federal Reserve Board are sufficiently disturbed by weakness in the jobs market to give the economy another boost. Fed chairman Ben Bernanke will reach into his bag of tricks and announce new stimulative measures—“additional steps” is his preferred language—if not at the meeting of the Fed’s monetary policy committee next week, then at the August conclave of central bankers in Jackson Hole.

Since none of this makes much dent in unemployment, and since Europe is headed for what might be a deep recession despite the pledge of European Central Bank president Mario Draghi to “do whatever it takes” to save the euro, don’t break out the champagne. But neither should you panic.

The gloomier crowd says that the economy is stalled, that growth has not merely taken a summer vacation. GDP, which had grown at a 3 percent rate in the last quarter of 2011, increased by only 2.0 percent in the first quarter and 1.5 percent in the second, and will notch up still slower growth the rest of this year and next. The chief financial officers of the largest corporations plan to sit on their cash piles until the fog concealing future policy lifts. Small businesses won’t take up the slack, worried as they are about future health care costs and President Barack Obama’s promises to raise their taxes and, given the chance by voters, inflict who-knows-what-other costs on them. Only one in five small businesses say they will add jobs next year, and 82 percent say the country is on the wrong track.

This gloomier crowd tends to pooh-pooh talk of a resurgence in the manufacturing sector. Manufacturing output, which grew at an annual rate of 9.8 percent in the first quarter, managed only 1.4 percent growth in the second. Business investment, excluding volatile components, dropped significantly last month. Exports, an important source of recent growth, have slowed as Europe dips into recession, and the economies of China, Brazil and India cool. That decline in overseas sales, which is already hitting the profits of U.S. automakers and others, will accelerate as the dollar strengthens relative to the troubled euro.

Nor are forecasters of the gloomier persuasion cheered by the profits performance of some of America’s better companies. For every big-name winner, there is a big-name loser: earnings of Starbucks and even of mighty Apple disappointed the market. Many of the companies that did report satisfactory profits managed that feat by cutting costs rather than growing sales, and there is a limit to how much further costs can be cut. Frightened retailers, convinced that consumers will become progressively more skinflint as the weeks ahead produce more bad news, want to lure parents to their shops now. So they are already offering discounts and other inducements (free flu shots) to parents who have to equip their little darlings for a return to school at summer’s end.

Worse still, the gloomier say the merely gloomy are counting too much on a housing recovery. Despite record low mortgage rates, sales of both previously occupied and new homes fell in June to the lowest levels seen in several months, and the median price of new homes dropped by 3.2 percent compared with last year at this time. Credit standards are so tight that few can qualify for mortgages, and 11 million Americans owe more on their homes than those homes are worth—they are underwater.

These gloomy and gloomier thoughts are rays of sunshine compared to what passes for wisdom among the gloomiest of our analysts, who see a new recession and long-lasting stagnation in their crystal balls. They warn that those who are waiting for the Fed cavalry to ride over the hill and rescue the economy are doomed to disappointment. They say that if the Fed adopts an idea reportedly suggested by the Bank of England—make cheap credit available to banks to lend to businesses and consumers—it will be wasting its time and balance sheet. The banks are awash in loanable funds, businesses are cash-rich and opportunity-poor, and interest rates are already so low that lower still will not attract borrowing. As the Manhattan Institute’s Diana Furchtgott-Roth points out in, “More liquidity is unlikely to impart more impetus to the sluggish economy…. Congress and the president should not count on the Fed to bail them out of their mistakes…. Central banks are unable to help in the face of persistently flawed economic policies.”

The deep-gloom set also believes that many of the unemployed will never again be employable as their skills will have atrophied or become irrelevant in the face of fast-changing technology. Renewed growth cannot cure that problem.

Their main worry, however, concerns government policy. If Congress does not vote to extend the Bush tax cuts, and to head off the spending cuts (most in defense) mandated for year-end, some 4.5 percent will be ripped out of the economy, sending America into still another recession. Until now, Democrats shared Republicans’ horror at the prospect of driving off that “fiscal cliff,” or what some call taxmageddon. No longer. Democrats now say that if Republicans don’t agree to substantial tax increases on everyone earning more than $200,000, the group Obama calls “millionaires and billionaires,” they will welcome a dive over the edge of that cliff. The party with a glorious history of Franklin Roosevelt’s New Deal and Harry Truman’s “Fair Deal” has become the party of “No Deal.” Weighty voices in the Democratic party say that the new recession triggered by tax increases and spending cuts will be short and shallow (they cite the Congressional Budget Office forecast that a new recession would be relatively mild), and that the higher taxes and lower spending that will cause it will also cut the deficit and renew confidence in the U.S. economy. Rarely has John Maynard Keynes’ faith in the curative power of deficit spending been so suddenly and completely abandoned by former acolytes, now rushing to adopt a new heretical faith: prosperity-through-austerity.

If all of this does not cause you to enlist in the ranks of the gloomiest, consider the set of data compiled by Nicholas Eberstadt, political economist and demographer at the American Enterprise Institute, and published under the title, A Nation of Takers. Government transfers resulting from some 50 benefit programs—money taken from some taxpayers and redistributed to others—continue to grow at an exponential rate, and twice as fast as per capita income. Between 1969 and 2009 these transfer payments have risen from 7.8 percent of personal income to 17.6 percent. Most significant, Eberstadt shows that almost half of all Americans live in households receiving some government benefits. It is not unrealistic to expect this fact to affect votes in November, and to create an atmosphere favorable to President Obama’s goal of making our country more like European social democracies, should he be given the opportunity.

Let me conclude with two bits of cheer. First, economic forecasters were invented to make weather forecasters look good. They badly over-estimated the rate at which the economy would grow this year, and it is not impossible to guess that in their herd-like revision of their forecasts they might overshoot on the gloomy side. Second, American entrepreneurs aren’t about to shut their garage doors and put an end to the innovations that sweep away outmoded methods of business and create more efficient new ones—call it creative destruction. Nor are Americans who prefer a less intrusive state—and that is the majority—certain to remain insensitive to the risk created by politicians whose main appeal is to a nation of takers. All is not yet lost.

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