The Economy and D.C.: Renewed Weakness
Published: June 11, 2011
The recent deluge of weak economic data has led to a guessing game among analysts. Is the weakness temporary? Or is there more bad news to come?
Ben Bernanke, chairman of the Federal Reserve, weighed in last week, saying that growth will recover later in the year as gas prices fall and the effects of the Japanese tsunami fade. That is the too-easy answer.
Oil prices are a wild card, and the impact of other setbacks is probably overstated. If disruptions from the Japanese supply chain were a big force behind weak job numbers in May, for instance, work hours would likely have been cut back. But hours held steady, while job growth slowed broadly. That indicates general weakness.
Even if temporary setbacks were to blame, the economy’s inability to take hits without backsliding is a sign of underlying fragility. So the important question is not the extent to which temporary problems are in play, but whether the economy will improve steadily as those problems work themselves out.
Unfortunately, it seems more likely to stagnate. Private-sector job growth, such as it is, will be undercut by continuing mass layoffs of public employees. Foreclosures, driven by joblessness and falling home prices, are expected to further depress property values. These factors — along with a faltering stock market — will constrain consumer spending. So it is folly to believe that the economy is ready to stand on its own, if not for passing setbacks. And yet that is the view from Washington.
Federal support for the economy is ending. The stimulus from 2009 is all but spent, while the payroll tax cut and extended federal jobless benefits from 2010 are set to expire at year’s end. Foreclosure relief is paltry. The Federal Reserve bond buying program, which has buoyed the stock market, is scheduled to end this month.
In addition, Republican lawmakers are demanding immediate spending cuts as a condition for raising the debt limit, and the White House is likely to accede. Deep reductions would further damage the economy.
Mr. Bernanke warned of the danger in sharp near-term budget cuts and proposed a sound alternative: avoiding big cuts now in favor of enacting a credible plan for deficit reduction to be rolled out gradually.
Of course, doing no harm will not be enough. The economy needs help, like direct federal job creation and options for homeowners to reduce the principal on troubled loans.