By Clive Crook
Published: July 4 2010 20:34
The US recovery is faltering. Last Friday’s jobs report, though not discomfiting the markets, contained more bad news than good, and followed a slew of other disappointing indicators. What Congress can do in current circumstances is limited, but Washington’s politicians are making sure to avoid doing even that. A limping recovery and a squabbling, impotent government are no formula for restoring confidence.
Non-farm payroll employment fell by 125,000 in June. This was roughly as expected, since the government was shedding temporary census workers. The headline unemployment rate fell from 9.7 per cent to 9.5 per cent – good news, on the face of it, except that it happened for the wrong reason. The number of people searching for work fell: if you are out of work but no longer looking, you are not “unemployed”.
Private-sector hiring, a key number, came in at 83,000, less than expected, following an even worse number for May. Average hours worked and hourly earnings both fell, albeit modestly – leading indicators of continued weakness in the jobs market. Seasonally adjusted, the median duration of unemployment rose to 25 weeks, adding to fears that European sclerosis might infect the US.
These gloomy figures did not appear in isolation. The Institute for Supply Management’s manufacturing index came in lower than expected. The outlook for hiring and orders worsened. The housing market wobbled again, as tax credits expired. Pending home sales fell by 30 per cent in May, against an expected decline of 12.5 per cent. That was bad news for house prices, still barely off their 2009 lows. More analysts are starting to fear a double dip in housing.
As I noted in a previous column, interaction between the housing and labour markets is a particular concern. Negative equity ties homeowners down, impeding the mobility that boosted jobs growth in previous US recoveries. Shattered net worth, the ongoing threat of foreclosure, and the stuttering jobs market all weigh with unusual force on consumer confidence – which dropped sharply in June, by the way, according to the Conference Board.
With the recovery stalling, how should policy respond? Simple: keep monetary policy loose, and provide fiscal stimulus if conditions permit. But do they permit? With elections on the way, the quarrel in Washington over this question is increasingly bitter. The result is a degree of paralysis unusual even by this town’s remarkable standards.
Conditions not only permit but demand that fiscal stimulus should be extended. Long-term interest rates are very low. The US has the luxury denied to other countries of being able to print the world’s reserve currency. One day, inflation will again be a problem; today, it is the least of the country’s worries. There are no signs of stress in the market for US government debt.
Now, this will not last. There will come a time when the country’s fiscal course has to change. The Congressional Budget Office’s latest projections underline the point. On business-as-usual assumptions (different from the “current law” baseline, but more realistic), US public debt is on course to exceed 100 per cent of gross domestic product in 2025 and to reach 185 per cent of GDP in 2035. Strong measures – spending cuts and tax increases – will be needed to stabilise the ratio at a safe level, by which I mean a level that will permit strong fiscal action in the next economic crisis.
To ignore this, as advocates of continued stimulus tend to, is a grave mistake in both political and economic terms. For the sake of maintaining fiscal policy as an anti-recession tool, a commitment to fiscal control is needed right now. With alarm over the outlook for debt so widespread, this might be the best single thing Congress could do to restore confidence. A long-term fiscal-consolidation strategy would provide additional stimulus in its own right – more, perhaps, than an extra $100bn-$200bn added to the short-term deficit.
Granting all this, short-term restraint is both unnecessary and dangerous. A second downturn, if it is allowed to happen, will overwhelm the effect on the debt of any short-term tightening. The balance of risks points to keeping fiscal policy loose this year and next. The most recent data only strengthen the case.
This laughably simple prescription – maintain or add to stimulus for the time being, plan to reduce the debt once the economy strengthens – is evidently beyond both branches of government. In Congress, Republicans sense triumph in November. A failing recovery is their friend, so long as they can blame the administration’s supposed fiscal irresponsibility. The strategy is working. It even has the party voting to block extensions to unemployment benefits, which under the circumstances is not just bad economics but an affront to ordinary decency.
But where is Barack Obama’s leadership when you need it? The White House is letting Republicans win the argument by refusing to address the long-term issue. The president set up a fiscal commission to make recommendations – a classic stalling device. He and his party, if they believe in anything, believe in bigger government. Yet he has tied his own hands on revenues by promising no tax increases for most Americans. He has pushed through an unpopular healthcare reform that only he and his most besotted allies believe will cut costs.
Is it surprising that the country thinks fiscal policy is out of control, even to the point of looking warily at extended jobless benefits? To get its way on short-term stimulus, the White House needs to talk seriously about long-term budget policy. The silence is deafening.
Copyright The Financial Times Limited 2010.
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