Economic Growth Slows In First Quarter. What If This Is As Good As It Gets?
Will days of strong economic growth ever return? And what happens if they don't?
There was some unwelcome news in this morning’s release of the first quarter GDP figures by the Commerce Department:
The American economy slowed to a crawl in the first quarter, but economists are hopeful that the setback will be temporary.
Total output grew at an annual pace of 1.8 percent from January through March, the Commerce Department said Thursday, after having expanded at an annual rate of 3.1 percent in the fourth quarter of 2010.
When the year first began, economists had been expecting a much more robust growth rate of about 4 percent, only to be barraged by bad report after bad report as the days wore on. Turmoil in the Middle East set off a jump in oil prices. Winter blizzards shuttered businesses and delayed construction, causing investments in nonresidential structures like office buildings to fall by 21.7 percent compared with an increase of 7.6 percent at the end of 2010. Imports, which are subtracted from output, surged, and military spending sank.
Still, economists expect many of these problems to fade later in the year. Last quarter’s dismal news was, hopefully, “a pause, not a trend,” said Kathy Bostjancic, director for macroeconomic analysis at the Conference Board.
Of these various economic menaces, the most enduring is probably higher commodity prices, which reduce the amount of pocket money that households and businesses have available to spend on other purchases and, in the case of companies, hires. Gasoline prices have shown little sign of falling in recent weeks, and have nearly neutralized the 2011 payroll tax cuts that were intended as a stimulus.
“Consumers are spending more, but it’s getting soaked up in higher gas prices and higher food prices,” the chief economist at RDQ Economics, John Ryding, said. “That’s not leaving nearly as much left over for discretionary spending.”
Declines in government spending will continue to drag on the economy throughout the year, as strapped state and local governments cut back and the federal government tries to cut down on nonmilitary spending. Last quarter’s steep drop in military spending, which tends to be volatile, will probably reverse itself later in the year, economists said.
Ezra Klein looks at the numbers and points out something that’s rather obvious:
What we need right now is something different from, and faster than, normal growth. What we need right now is catch-up growth. We’ve spent years underperforming economically. We’re 7 million jobs below where we were when the recession began. Like a man who has been starved for a year, getting back to normal won’t cut it. We
Here’s the bottom line: “Recovery” means a “restoration to a former or better condition.” Our economy isn’t anywhere near its former condition, and 1.8 percent GDP growth isn’t enough to get us there.
Obviously, but the question is how do we get there or, more importantly, will we ever get there?
Last October, Dave Schuler wrote a piece over at his own site suggesting that we may be entering an era where economic growth will be more like Europe than what we’ve become used to in the post World War II era:
[T]he experience in growth over the last twenty years shows a markedly slower rate than prevailed over the previous twenty years or the previous forty years.
Second, the period since 1990 has included two bubbles: the dot-com bubble and the real estate bubble. Those bubbles are clearly evident in the peaks over the last twenty years.
What forces could lead to growth at the 4% or higher level? Besides the unexpected which is just that, unexpected, I can only think of two. If you believe that we’re going to experience growth at a level higher than that of other developed countries you must either believe that we’re going to continue to experience a high level of immigration and/or that we’re going to continue to experience bubbles
Encouraging immigration to help sustain economic growth would be a rational policy choice, and our immigration system is broken and long past the point where it needs to be reformed However, two factors suggest that this is unlikely to happen. First, we have clearly entered one of those times in American politics where anti-immigrant sentiment is on the rise. It’s far more likely that immigration laws are going to to become more restrictive in the future rather than less restrictive, especially since immigrants are an easy target for politicians and demagogues to point to as the reason why there aren’t enough jobs. Second, a slow economy in the US tends to reduce immigration since the economic incentives for coming here are less apparent than they are during a boom period. So, don’t necessarily count on the immigrants to save us.
So does that mean we should be trying to create another economic bubble? Well, we have learned quite well over the past three years or so what the consequences of an economic bubble actually are. Those few years of spectacular growth and big profits are tempting but they don’t last long. In the end, the artificial diversion of resources that an economic bubble creates will end up being corrected when the bubble collapses and takes the economy down with it. Creating economic bubbles isn’t all that hard, of course. All it takes is an incredibly loose monetary policy at the Federal Reserve. What happens thereafter, though, makes whatever benefits the bubble provides not worth the cost.
Moreover, the old tools for stimulating the economy don’t seem to work anymore. If nothing else, the obvious failure of President Obama’s stimulus package to turn around the economy or halt the collapse of the jobs market would seem to be proof that the old Keynesian tools don’t work anymore. With a Federal Budget that is increasingly diverted to paying interest on the National Debt and funding entitlement programs, neither one of which contribute all that much to economic growth, it’s simply not possible to throw money at the problem anymore (which, I presume, would be Klein’s favored solution). Of course, budget deficits also mean that tax cuts, the traditional Republican answer to slow economic growth, isn’t really an option at the moment either. In fact, taxes will clearly have to be increased for some people, and that’s likely to further depress economic growth.
Meanwhile, the factors that are holding the economy back, such as rising energy and commodity prices, don’t seem to be going away anytime soon.
So, we may be headed for an era where our economic growth is more similar to Europe than we’d like. That means unemployment is likely to be high for some time to come, that American optimism will become a thing of the past, and that our political system is likely to become even more polarized than it already is.