The market's nasty plunge: hardly the worst news....
What should one make of collapsing GDP growth, debt-to-GDP crossing the magic 100 percent number, anemic private-sector job creation, persistent high unemployment claims, two-year lows for manufacturing and personal income? The economy added 117,000 net non-farm jobs in July; the private sector actually added 154,000, but state governments laid off 37,000 last month. Unemployment stands at 9.1 percent but hold the champagne: the economy must add 200,000 to 250,000 jobs per month to keep place with population growth. In a weak economy a drop in unemployment indicates more discouraged workers who have given up searching for jobs, and thus are not counted in the bellwether unemployment number.
Jennifer Rubin at Right Turn dives into the job numbers, and notes that the picture is even worse:
Buried in the job stats was a number — 193,000 — that dwarfed all the rest. That is the number of workers who left the job market. If 193,000 left and only 117,000 jobs were added, we lost 76,000 jobs. Moreover, this is not an aberration.
When President Obama took office in January of 2009, the labor participation rate was 65.7 percent. Now, “The labor force participation rate is currently 63.9 percent. That is the lowest level since 1984,” says Matt McDonald, a communications and business strategist who previously worked in the Bush administration. “If the labor force participation rate today were 65.7 percent, there would be an additional 4.2 million people in the workforce.” In that case, the unemployment rate would be 11.5 percent not 9.1 percent.
Tellingly, in May 2009 unemployment was 9.4 percent; the economy has been unable to generate jobs fast enough to spur a true recovery.
And what to make of two-year Treasury bills at a record low yield? Economist David Malpass warns that near-zero interest rates discourage thrift and benefit only big banks (who are not lending) and big corporations (they invest abroad). He sums up the high drag of a cheap dollar policy:
Weak monetary policy isn't providing monetary stimulus. Under the 2010 QE2 Fed bond-buying scheme, the more the Fed intervened in markets, the weaker the GDP growth each quarter. Banks are overflowing with liquidity already, but their lending is rationed by armies of federal regulators sitting rent-free in their offices. The interbank market—which normally moves large sums from cash-rich banks to the growing banks that lend to new and small businesses—can't function properly with rates at zero. Monetary policy's goal of market-based allocation of capital has morphed into subsidizing debt and manipulating the dollar downward.
Only Japan, after the bursting of its real-estate bubble in 1990, has tried anything similar to U.S. policy. For close to a decade, Tokyo pursued a policy of amped-up government spending, high tax rates, zero-interest rates and mega-trillion yen central-bank buying of government debt. The weak recovery became a deep malaise, with Japan's own monetary officials warning the U.S. not to follow their lead.
As American capital escapes the weakening dollar, it drives down U.S. living standards. Since the end of 2008, the average hourly wage is up only 4.5% (to $22.99) while the consumer price index is up 6.1%. Social Security checks haven't gone up at all. Much of the private sector feels stuck in the mud, yet Wall Street and Washington are booming. They are the middle-men in the wealth transfer from savers to debtors and foreigners, creating thousands of millionaires each year trading currency volatility and inflation hedges. The profits are immense, but it's a zero-sum game in which the losers are the millions of Americans who work and save in dollars. Put the question to the public or to small businesses whether President Obama should run a weak-dollar policy and the answer is a thunderous "No!"
Malpass thus puts in perspective yesterday's announcement from the Fed that it will keep interest rates artificially low for another two years, a genuflection to a weakening economy and dim prospects for recovery before mid-2013. The stock market's rally notwithstanding, this is bad news for us ... and for Barack Obama too.
As George Will wrote last week:
Obama’s presidency may last 17 or 65 more months, but it has been irreversibly neutered by two historic blunders made at its outset. It defined itself by health-care reform most Americans did not desire, rather than by economic recovery. And it allowed, even encouraged, self-indulgent liberal majorities in Congress to create a stimulus that confirmed conservatism’s portrayal of liberalism as an undisciplined agglomeration of parochial appetites. This sterile stimulus discredited stimulus as a policy.
Obama’s 2012 problem is that he dare not run as a liberal but cannot run from his liberalism. The left’s narrative for 2012 is that by not offering another stimulus, Washington is being dangerously frugal. This, even though his stimulus — including cash for clunkers, cash for caulkers, dollars for dishwashers (yes, there actually were money showers for home improvements and greener appliances), etc. — led downhill.
Will notes a classic Mark Twain quip about things ending, as the debt ceiling negotiations did:
The story is that as Mark Twain and novelist William Dean Howells stepped outside one morning, a downpour began and Howells asked Twain, “Do you think it will stop?” Twain answered, “It always has.”
But he adds: "America may be one-third of the way through a lost decade — or worse, toward a lost national identity.”
The numbers are so bad that such an outcome may be "baked in the cake"--i.e., that no growth agenda will quickly move economic numbers. This is because we have not only a common, cyclical income-statement recession but also a rare, non-cyclical balance-sheet debt overhang depression.
Addressing the debt problem is thus a predicate for rejuvenation: before recovery we need restoration. The best plan I have seen was floated last week by Senator Rob Portman (R-OH), a former director of the Office of Management and Budget:
My hope is that Congress and the president will make further structural spending reforms to respond to the fiscal crisis. But at a minimum, lawmakers should commit to making the "dollar-for-dollar" rule a permanent debt-limit policy. Using Congressional Budget Office data, I have calculated that if we apply this every time we reach the debt limit over the next 10 years, we will balance the budget by 2021 without raising tax rates over current rates.
That's more than $5 trillion in spending cuts over the decade. And because many of these spending reforms would necessarily carry over past 2021, the savings in the following decade would be even larger. If this framework were followed, starting in 2021 budget surpluses would end the era of debt-limit increases.
Granted, cutting more than $5 trillion over the next decade will be challenging. But that is out of the $46 trillion in projected spending which increases the annual budget by 57%. So there is room to cut.
This tops the Ryan Plan, which is too wonky, too complex.
Marc Theissen, writing re Portman's idea, adds a helpful chart showing that if we start in FY2102 but cutting $300 billion from today's $1.5 trillion deficit number, by FY2016 the deficit can be cut to $600 billion and by FY2021 the budget balances. Theissen notes that the most important principle emerging from the debt deal is that each dollar of new spending must be "paid for" by a dollar of spending cuts; this reverses the traditional "pay for with new taxes" rule that has been the staple of Beltway politics for a generation.
A new President--Obama will ignore this idea--could show progress by 2016, as re-election will require signs of progress. "Dollar-for-dollar" would keep the debt level constant, offsetting new deficit-caused debt. Markets would likely respond to the improving debt picture by boosting investor balance sheets. Without such improvement, the consumer spending strike would likely continue, undermining recovery prospects.
Meanwhile, rolling back Obama's regulatory assault on business--especially hard on small firms which are the backbone of domestic job creation--will spur growth. And growth will improve the pace of debt reduction. One example of how to kill enterprise and jobs: a single ObamaCare rule on labeling menus with calorie counts could cost every Domino's Pizza franchise owner 12 percent of annual profits.
And there is one more building block: ditching ObamaCare for true reform. Alas, a President who sees no more places in the domestic budget to cut is hardly a candidate for reform. So this idea awaits 2013 at the earliest.
Mark as well one warning sign, for defenders of the unlimited welfare state to ponder: the riots in Britain, which are the criminal rage of a dependent class raised in a womb-to-tomb welfare state, where social bonds within a community have been sundered, displaced by living upon taxpayer largesse.
Bottom Line. Restoration is the proper language, rather than recovery, for what the republic needs. Recovery is the language that applies to getting out of a recession--suitable for income-statement economic problems. We Uncle Sam has a huge debt problem--a bad national balance sheet that will get worse before--if--ultimately it gets better. The vocabulary for addressing this is not the language of business cycle recovery. It is that of resurrecting a vision of a smaller federal government, more state autonomy and private sector freedoms, coupled with repudiation of the unlimited welfare entitlement state, whose dire consequences we can see being played out in European cities. It is unsustainable economically, and lethal socially, to seek to prop up this decaying 20th century progressive edifice.
Without a bumper-sticker vehicle for communicating key ideas, it will be hard for the GOP to make its case in 2012. Try this: "Restoration: Dollar-for-Dollar."
Letter from the Capitol, LFTC, Economy, Conservative Politics