Icebergs On The Horizon?

Like great art, pornography and classic rock, everyone knows an economic recovery when they see one.  Or do they?

Until recently, many economists were steadfastly arguing that the worst economic crisis since the Great Depression was over.  Then the worrying began.  Unemployment stubbornly hovered over 9 percent.  Foreclosure rates continued to rise as the American dream of owning a home fades for many people.  Existing home sales fell to their worst level in more than a decade. House repossessions posted a 6 percent year-over-year increase in July.  The federal deficit is expected to be more than $1 trillion in the current fiscal year.

Though technically the US may be in a recovery since GDP is expected to grow an anemic 2.6 percent this year, the good times are not rolling for most Americans.    They remember 1999 as a prosperous time when unemployment was 4.2 percent, the lowest rate in 30 years.  A year earlier, the government had its first surplus in 29 years. Real wages increased at their fastest and longest growth rate in two decades.  Inflation was at the lowest rate since the 1960s.   Those heady days of the Clinton Administration, which were propped up the dotcom bubble, are long gone.  What Americans can hope for is for things to be nearly as good.  It won’t take much of a change to make a difference.

• For instance, GDP growth in the second and third quarters of 2007 was more than 3 percent.  Even a small increase over current levels will help.  Targeted tax cuts might help, such as suspending the planned increases in taxes on dividends and capital gains scheduled to go into effect on January 1.  Though its tempting to also suspend the so-called death tax, I am not convinced that the money lost will do much to help the economy.
• Housing will not improve until the jobs situation improves.  One way to help stabilize the market would be to allow bankruptcy judges the authority to write down the value of home mortgages.  Also, banks, who have opposed this idea, should get some relief from burdensome accounting rules that make them write down these obligations.
• everyone short of Hannibal Lecter got jobs during the 1990s.  The Congressional Budget Office sees the jobless rate falling below 8 percent in 2012 and hitting 5 percent only in 2014.   That’s way too slow.  Maybe the government should increase the economic incentives for hiring workers in the U.S. for at least two years such as a rebate on the payroll tax and help in off-setting the costs of health insurance.  The only other way to boost employment is through another stimulus plan bigger than or equal to the $787 billion proposal enacted in 2008.  In the critical mid-term election year, that type of bill stands no chance of getting passed through Congress.
• Federal spending has to be brought under control.  Experts have said for years that entitlements such as social security and medicare need to be cut though Congress has lacked the will to do it.  This is a worldwide problem.  Government debt in the US, Europe, and Japan is $32 trillion. Their combined economies are $34 trillion.

The U.S. economy is like an ocean liner lumbering along the Atlantic.  Icebergs are everywhere but the water does calm down.  It’s a question of when.

–Jonathan Berr