The Grand Illusion
The markets are soaring and the economy continues its snail like pace toward recovery, but as Morton Zuckerman recently noted, it is the "Great Recession followed by the Grand Illusion." Zuckerman begins with the following observations, “The country isn't really advancing. By comparison with earlier recessions, it is going backward. Despite the most stimulative fiscal policy in American history and a trillion-dollar expansion to the money supply, the economy over the last three years has been declining. After 2.4% annual growth rates in gross domestic product in 2010 and 2011, the economy slowed to 1.5% growth in 2012. Cumulative growth for the past 12 quarters was just 6.3%, the slowest of all 11 recessions since World War II.”
The reality is that the economy is still fragile and the job creation side of the equation is still hurting. I don’t buy into the notion that Zuckerman advances not spending the extra 600 billion dollars as result of the recent automatic cuts is a bad thing, since it frees up 600 billion dollars for the private sector. He is right about the negative impact of the recent tax increases as well as the Obamacare taxes coming in full force in 2014. Obamacare's negative impact is being felt, and there is no doubt that this will drag well into the future if not repealed soon. Many companies and individuals are already seeing health care premiums go up, and they are predicated to go up further; the cost being shared with workers and consumers alike. What Congress has already passed or will pass in the future will have little impact on growth, and we have a President who views government as the ultimate engine of growth, not the private sector.
As for the real unemployment numbers, Zuckerman writes, “February's headline unemployment rate was portrayed as 7.7%, down from 7.9% in January. The dip was accompanied by huzzahs in the news media claiming the improvement to be 'outstanding' and 'amazing.' But if you account for the people who are excluded from that number—such as 'discouraged workers' no longer looking for a job, involuntary part-time workers and others who are "marginally attached" to the labor force—then the real unemployment rate is somewhere between 14% and 15%.”
Zuckerman's point about the discouraged leaving the job market tells a different story not discussed by the press. With job participation rates dropping to levels not seen in thirty years, we are not really seeing a massive expansion of new jobs and opportunities but the disappearance of jobs. The unemployment numbers hide an economy struggling, and if one looks at the entrepreneurial side of the equation, many Americans are not starting new businesses in numbers seen in past recoveries. The entrepreneur spirit is being crushed by regulations, increase taxes over the past year, and the forthcoming Obamacare that will add even more to the cost of doing businesses.
The Federal Reserve's monetary policy is based on the fact that the economy is still struggling and the various quantative easing is reflected in a belief by the Fed that the economy is still hanging on as opposed to racing to recovery. Zuckerman observed in his piece that the 236,000 new jobs created in February were misleading since many of these jobs were low-wage part time endeavors. Many of these jobs were the second and third jobs by individuals simply trying to keep up. The number of Americans unemployed six months or longer increased by 89,000, the number of American on food stamps has gone up, and middle class wages continue to go down. These are not the signs of a recovery but an economy creeping along. There is nothing outstanding about this recovery, and the sooner we accept that what we are seeing is an illusion, the sooner we can develop long term policy for true sustainable growth.