Politics is pulling America back down
By Clive Crook
Published: March 6 2011 19:23
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The US economy is showing signs of life but the expansion is still tentative. That is the message of the most recent economic indicators. Congress and the White House have no intention of improving the country’s prospects and might choose to make things worse. That is the message from Washington, DC.
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First, the good news. The US jobless rate fell to 8.9 per cent in February, the lowest for nearly two years. Private-sector non-farm payrolls expanded by more than 200,000. About 100,000 new jobs a month are needed for employment to keep pace with a growing labour force, a race that the economy has mostly been losing since a faltering recovery in output began in 2009. Job creation at February’s healthier rate can close the gap – though without further acceleration, it will take more than 10 years.
First, the good news. The US jobless rate fell to 8.9 per cent in February, the lowest for nearly two years. Private-sector non-farm payrolls expanded by more than 200,000. About 100,000 new jobs a month are needed for employment to keep pace with a growing labour force, a race that the economy has mostly been losing since a faltering recovery in output began in 2009. Job creation at February’s healthier rate can close the gap – though without further acceleration, it will take more than 10 years.
Recovery even at that pace, however, cannot be taken for granted. The expansion is still at risk of petering out. The housing market, where the trouble began, is far from mended. The Case-Shiller house-price index has been falling again in recent months. On plausible estimates, it might have another 20 per cent to go. Already, nearly a quarter of all residential mortgages are attached to properties that are worth less than the outstanding loans. New home sales are down. New mortgage applications are down.
After months of gradual improvement, consumer confidence has slumped recently too, according to Gallup. The pollster’s economic confidence index combines a measure of consumer sentiment on current conditions with another that looks at prospects. The past two weeks have seen a sharp reversal, mainly driven by worsening expectations.
Gallup says the drop is probably tied, in part, to the recent uptick in gasoline prices and to fights over public finances in Washington and in cities and states across the country.
This seems only too plausible. In fact, public policy is leaning against the recovery in three distinct ways.
First, the stimulus spending begun in 2009 – much of it channelled through the states – is fading. Second, the new Republican majority in the House of Representatives is intent on abruptly accelerating this decline. Most likely, Democrats will meet the GOP’s demands part-way or see government shut down. Third, beyond the short term, fiscal policy at state and federal levels is a black box. Nobody knows what to expect on taxes or spending. How far will taxes rise? Will public-sector workers’ pensions be paid? What will become of Social Security? Nobody knows.
These factors interact in ways that are sometimes obvious, sometimes not so obvious. Plainly, the easing down of federal stimulus outlays is the reason many states are having to cut their spending so deeply – hence the battle with public-sector unions. State and local governments are cutting jobs even as private employment recovers. (Their payrolls dropped by 30,000 in February.)
For a subtler link between fiscal-policy paralysis and the flagging recovery, consider one aspect of the new employment figures: US labour-force participation has fallen in recent years. Since the recession began it has fallen further, especially for men with no more than a high school education. In 1970, nearly 80 per cent of working-age high-school-only men had a full-time job; today, fewer than 60 per cent do. The jobless figures only count people looking for work. Many of those without full-time work aren’t even looking.
How do these labour-market refugees support themselves? One answer is early retirement. The proportion of Americans taking Social Security at the earliest age allowed – 62, on current rules – is growing, even though this reduces their benefits. The number retiring earlier than that and claiming disability benefits has surged as well.
Word in the financial planning industry is that uncertainty over Social Security is one factor persuading some to stop looking for work and retire instead. Get what benefits you can while the system is there, appears to be the thinking. The result: a permanent waste of manpower, a shrinking of the tax base that further worsens the fiscal outlook, and a European-style hardening of the economic arteries.
In ways such as these, under the surface of a hesitant recovery, the US economy is suffering long-term harm. Washington should be maintaining fiscal support for the states (with conditions), widening its labour-market interventions (with greater support for relocation and retraining), and increasing its so-far timid efforts to stabilise the housing market by encouraging mortgage writedowns. This short-term fiscal commitment should be tied to long-term entitlement reform, not just for the sake of fiscal balance but to dispel uncertainty. A comprehensive tax overhaul is needed too, for the same reasons, and so that revenues can rise to cover spending without pushing tax rates too high.
For now, Congress and the White House are discussing none of this. House Republicans are fixated on immediate spending cuts, and continue to threaten a shutdown unless they get their way. President Barack Obama stands aside, while Democrats in the Senate look for a short-term compromise.
As the country’s companies and workers wrestle with deep and urgent economic problems, its leaders perform their comic opera of avoiding a shutdown – a crisis of their own devising, a figment of their pathological machinations. If the US comes through this ordeal without permanent damage, it will be no thanks to its politicians.
Copyright The Financial Times Limited 2011.
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