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Hysteria Over the Deficit Has Ground the Recovery to a Halt

The government is heading in exactly the wrong direction: raising taxes on the middle class, and cutting spending.
 
 
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We are in the most anemic recovery in modern history, yet our political leaders in Washington aren’t doing squat about it.

In fact, apart from the Fed – which continues to hold interest rates down in the quixotic hope that banks will begin lending again to average people – the government is heading in exactly the wrong direction: raising taxes on the middle class, and cutting spending.

The Bureau of Labor Statistics reported Friday that American employers added only 157,000 jobs in January. That’s fewer than they added in December (196,000 jobs, as revised by the Bureau of Labor Statistics). The overall unemployment rate remains stuck at 7.9 percent, just about where it’s been since September.

The share of people of working age either who are working or looking for jobs also remains dismal – close to a 30-year low. (Yes, older boomers are retiring, but the major cause for this near-record low is simply the lack of jobs.)

And the long-term unemployed, about 40 percent of all jobless workers, remain trapped. Most have few if any job prospects, and their unemployment benefits have run out, or will run out shortly.

Close to 20 million Americans remain unemployed or underemployed.

It would be one thing if we didn’t know what to do about all this. But we do know. It’s not rocket science.

The only reason for employers to hire more workers is if they have more customers. But American employers have not had enough customers to justify much new hiring.

There are essentially two sources of customers: individual consumers, and the government. (Forget exports for now; Europe is contracting, Japan is a basket case, China is slowing, and the rest of the world is in economic limbo.)

American consumers – whose purchases constitute about 70 percent of all economic activity – still can’t buy much, and their purchasing power is declining. The median wage continues to drop, adjusted for inflation. Most can’t borrow because they don’t have a credit record sufficient to allow them to borrow much.

And now their Social Security taxes have increased, leaving the typical worker with about $1,000 less this year than last.

The Conference Board reported last Tuesday consumer confidence in January fell its lowest level in more than a year. The last time consumers were this glum was October 2011, when there was widespread talk of a double-dip recession.

The only people doing well are at the top – but they save a large part of what they earn instead of spending it.

Overall personal income soared by 8 percent in the final three months of 2012 compared to an increase of just over 2 percent in the third quarter, but this income didn’t go into the pockets of the middle class. It went into the pockets of people at the top.

Wages and salaries grew a measly six-tenths of one percent.

Most of the rise in personal income in the last quarter was from companies rushing to pay dividends before taxes were hiked in 2013, and from an upturn in personal interest income. Both these sources of income went mostly to the well-to-do.

This explains why consumer spending is dropping. The Commerce Department said Thursday consumers’ spending rose 0.2 percent last month. That’s slower than the 0.4 percent increase in November.

So if we can’t rely on consumers to stoke the economy, what about government? No chance. Government spending is dropping, too.

The major reason the economy contracted between the start of October and end of December 2012 was a major reduction in government spending in the fourth quarter.

 
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