Memo to Obama: The 99% Needs a Recovery
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What is it with this economy? The Dow hits 14,000, the unemployment rate rises in January, and GDP actually falls in the last three months of 2012. Could it be that what's good for the stock market is bad for the rest of the economy? Could it be that captains of industry like weak labor markets, high unemployment, low wages -- and a Federal Reserve that has to use ultra-low interest rates to try to keep things afloat?
Well, yes, but the story is also richer and more complicated.
Basically, the economy is still weighted down by the legacy effects of the financial collapse of 2008 -- mortgages that exceed the value of homes, students staggering under the weight of college loans in a dismal job market, retired people for whom low interest rates mean low returns on savings, corporations looting pensions, and above all flat or declining wages.
It all adds up to a very weak recovery -- but the common element is insufficient purchasing power on the part of ordinary families. And this is about to be compounded by Fiscal Cliff II, namely Congress and the president deciding that what the economy really needs is a bracing dose of deflationary budget cuts.
What exactly happened in the last quarter of 2012 to cause the recovery not just to stall -- but to actually shrink the economy by a tenth of a point? According to the Commerce Department, there were multiple factors.
Exports slumped, business purchases to replenish inventory slowed, but here is the sentence that screams out: "Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third." In other words, cut government spending and you undermine a fragile recovery.
There was a little good news amid the bad news. Revised numbers indicate that the economy generated jobs in 2012 at a rate of about 32,000 a month more than first reported. But hidden unemployment -- part timers not finding full-time jobs -- rose again in January and wages have remained basically flat. The economy's gains still go mainly to the very top.
Seemingly, President Obama has moved off the deficit-hawk kick that marked his posture in 2010 when he appointed the Bowles-Simpson Commission, and 2011 when he agreed to a budget deal with massive cuts and automatic triggers adding up to about $4 trillion in deficit cuts over a decade.
Seemingly, too, the corporate-led "Fix the Debt Campaign" -- millionaires and billionaires telling the rest of America to tighten its belt for the greater good -- isn't getting a great deal of traction. Our friend Paul Krugman last week wrote a column, "Deficit Hawks Down," saying that we should pity this crowd -- for all the money they've spent, they keep being contradicted by events.
But despite the sheer unreality of their claims, the austerity lobby keeps winning by defining the terms of debate. Nearly everyone, right, center and left, is arguing about the economic recovery in terms of what the debt-to-GDP ratio should be in 2023.
That is the wrong question. The right question is: how do we get a stronger recovery going now? With robust growth, especially of wages, the debt ratio will come down. Excessive budget cutting in a depressed economy slows growth and worsens the debt ratio, but with the exception of Krugman, Joseph Stiglitz, and your faithful blogger, that's not a point widely made in the debate. (Let's also credit Jamie Galbraith, Bob Reich, Larry Mishel and Dean Baker.)