APRIL 3, 2010.
The 2010 Recovery
What happens when the reflation bill comes due?
Democrats are applauding and Republicans are criticizing Friday's report of modest job growth in March, and for once they're both right. The private economy is at last creating jobs, albeit not enough so far to conclude that the recovery of 2010 will become a durable expansion.
The jobs market does seem to have turned a corner, with the Labor Department's survey of businesses reporting 162,000 new jobs in the month, plus modest upward revisions in January and February. One bright spot is manufacturing employment, up 17,000 in March and now up for three straight months, as well as a modest uptick in average hours worked to 34 in a week, from 33.9.
The companion household survey showed a heftier increase of 264,000 net jobs, rising to 1.1 million so far this year, and as we learned in the last recovery this survey tends to lead increases in what business reports in future months. The upshot is that at long last—and 13 months after the $862 billion stimulus that the White House said would keep unemployment below 8%—we should see more robust job creation in the months ahead.
The question is how robust. The March job gains included 48,000 temporary Census workers, for a total so far of 87,000 Census hires, and several hundred thousand more in the months ahead. Take out this government hiring, and job creation looks feeble. Also dismaying is that the so-called total jobless rate, which includes discouraged workers, ticked up again to 16.9%.
It's especially distressing to see that the number of long-term jobless—those out of work for 27 weeks or more—jumped again to 6.55 million, and as a share of the total jobless hit a new record of 44.1%, up from 40.9% in February and 24.6% a year earlier. (See the nearby chart.) This means that nearly one of every two Americans who has lost his job is waiting at least a half year to get a new one. The damage in lost skills and human capital is enormous and can do life-long damage.
Congress keeps extending jobless benefits, and last week President Obama proposed a new subsidy for the jobless in the form of mortgage payment reductions if you're out of work. Democrats think this is good politics because they can accuse Republicans of being uncaring if they vote no.
But the irony is that these extensions only increase the incentive to delay going back to work, especially if most available jobs are temporary or pay less than their old ones. Democrats are ensuring that the jobless rate stays higher for longer (it's still a nasty 9.7%), which isn't compassionate and can't be good politics going into November.
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This mixed jobs picture is symptomatic of the larger economic recovery, which has been underway for nine or so months but has felt less than dynamic. The stock market is doing well, which is one portent of future growth. Corporate profits have been increasing smartly, which is also helping stocks, as has productivity as firms squeeze more output from each worker. Thanks to China and India in particular, global manufacturing has rebounded.
And of course the banking system has gone a long way to healing itself from the panicked lows of last March. The Obama Treasury deserves some credit on this score for ignoring the advice of its friends on the left who recommended nationalizing the banks, and tempering some of the worst banker-bashing.
Mr. Obama attacked us by name Thursday in Boston—the second time in a week—for mentioning last year that his policies might have had something to do with the stock-market's lows. We're glad to see the President pays such close attention to our work, but one reason the market has recovered is because some of his policies have either improved (the bank "stress tests" proved to be reassuring) or appear to be stymied on Capitol Hill (cap and tax, union card check).
The U.S. economy is a fantastic engine of prosperity, and left to its own devices its tendency is to expand. Especially after falling so far in the recession, a growth rebound was inevitable—and the biggest surprise so far has been that the bounce hasn't been more robust. Some of that must be laid at the feet of the policy uncertainty in Washington, with small businesses in particular having no clear sense of what their future costs will be. This may bear especially on the slow comeback in job creation.
The larger policy context is that the U.S. recovery has been built on an enormous reflation bet, both fiscal and monetary. The stimulus and its many sister subsidies (housing tax credits, cash for clunkers, etc.) have flooded the economy with government-directed cash and credit. We think marginal-rate tax cuts would have done much more for growth, as in 1983 and 2003.
The Federal Reserve has also kept and maintained an historically easy monetary policy. This was necessary for a time to offset the decline in monetary velocity in the wake of the credit panic, but the near-zero interest rate has also made it easier for banks to make money on interest-rate plays rather than actual lending. It is also contributing to higher commodity prices and distortions in the dollar bloc overseas. The Fed is fortunate that the mess in Greece has made the dollar seem a better reserve currency than the euro.
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As we look beyond this year, the bill for this Great Reflation will eventually come due. Coming out of the last steep recession, in 1983, both interest rates and tax rates were coming down. Today, they are both headed up. In 1983, the regulatory state was in retreat. Today, it is expanding across most areas of the economy.
A huge tax increase hits on January 1, as the Bush rates expire. Sooner or later, the Fed will get off zero and interest rates will climb. The neo-Keynesians who have dominated U.S. economic policy since 2006 are betting—hoping—that the expansion will have built up enough steam to ride out these and other growth shocks. The rest of us have to hope they're right.
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