by Adam Hersh / Center for American Progress
This article was originally published on MarketWatch.
Today’s weak economic growth numbers were as predictable as they are disheartening, and the blame lies squarely with those who opposed the president’s American Jobs Act nearly a year ago—and have in fact opposed an array of sensible economic policies to expand public investments that create jobs and economic growth ever since President Barack Obama took office.
But first the “news.” The $15.6 trillion U.S. economy slowed in the three months through June 2012. U.S. gross domestic product, or GDP—the sum total of all goods and services produced by workers and equipment in the United States—grew at 1.5 percent in the second quarter of 2012. We are growing, but slowing. And this must renew policymakers’ urgency for action to prevent our economy from dipping further.
Economists have known at least since last summer’s debt ceiling standoff in Congress that an economic slowdown was a high-probability outcome if policymakers failed to reverse steep retrenchments in public investments that create jobs and strengthen growth. The tremendous uncertainty created by the political spat stalled private investment and hiring at the same time that public investments in education, infrastructure, and energy efficiency, and social safety net programs such as unemployment insurance were running to the end of their terms for many out-of-work Americans.
Back in 2011 the economy slowed to 1.3 percent growth in the third quarter from 2.5 percent in the second quarter as that year’s debt-limit fight further unsettled skittish businesses and left consumers questioning whether lawmakers could be trusted to take the right policy actions to ensure a strong American economy. Nonresidential business investment growth slowed a year ago from double-digit growth in early 2011 to less than 10 percent in December, 8 percent in the first quarter of the year, and just 5.3 percent in today’s numbers.
This is why President Obama proposed the American Jobs Act in September. The act would have helped through job-creating, growth-enhancing public investments in education and transportation infrastructure, and by providing support for those most vulnerable and hit hardest by economic pressures. The forecasting consultancy Macroeconomic Advisors and economists at Goldman Sachs estimated last September that the American Jobs Act would increase GDP by an additional 1.5 percent and create an additional 2.1 million jobs. Moody’s economist Mark Zandi warned, “If policymakers do nothing, the odds are very high we’ll go into recession next year.”
And Congress accomplished next to nothing. Senate conservatives filibustered key elements of the proposal, and the Republican-controlled House of Representatives voted 33 times for a deficit-increasing repeal of health care reforms, but not once on a credible policy to spur jobs and growth. Meanwhile, the federal government continues retrenching public investments and services that stopped the recession and made a down payment on economic recovery, and state and local governments have cut purchases and investment for 11 straight quarters now. The public sector—one-fifth of the American economy—is in a policy-made economic depression.
Even worse, the deal emerging from last summer’s debt limit fight bound policymakers in a suicide pact that with other scheduled cuts will lead to a 1.3 percent of GDP economic contraction beginning January 1, 2013, unless lawmakers can agree not to. As we tick closer to this “fiscal cliff” time bomb, the specter is already haunting businesses who might otherwise hire workers and increase investment.
Now here’s the good news. There’s a lot we can do to change this situation and our private economy is carrying more momentum than headline numbers indicate. Though slipping to just 2.1 percent growth this quarter, the private sector has averaged 3 percent annualized growth since the U.S. economy began expanding again in June 2009. Though slowing, business investment still expanded in 9 of the 10 last quarters. America’s businesses are ready for business if they can be certain of sufficient demand from customers.
Indeed, the U.S. economy might muddle through if not for the global economic environment deteriorating rapidly, which is exacerbating the negative effects of our own too rapid retrenchment of public investments. The U.K. and European economies—who lead us in the move to fiscal austerity—are already entering recession. The U.K. economy contracted at a 2.8 percent pace in this quarter, and Germany and France flat-lined in the first quarter—growing at 0.5 percent and 0 percent respectively. U.S. policymakers should note this handwriting on the wall. Export growth, which helped lift the economy from recession, will be harder to sustain going forward as other economies slow and as drought in the United States drags on agriculture exports, which account for 11 percent of total exports. At $600 billion, the already large U.S. trade deficit will likely grow larger in the near future.
World economic events may be out of our control but policymakers have a choice to fix our economic situation at home. A sensible way to do this is to reverse the policy-imposed depression in public investments. There is no question that our young students need schools and quality teachers. There is no question that revamping America’s ailing infrastructure would boost business competitiveness. And as nearly 4 million mortgage refinancers know—with long-term interest rates near zero after inflation—there has never been a cheaper time to pay for such investments.
Should it choose, Congress still has the power to change this as well as the power to ensure that the long-term unemployed don’t lose unemployment insurance benefits when the program needs reauthorization in December. And the Federal Reserve, to its credit, is stepping hard on the monetary policy gas pedal to help get growth up and unemployment down but is far from “flooring it.” Ben Bernanke and the Fed still have plenty of monetary policy tricks up their sleeve and, with inflation at 0 percent in June, have no excuse for not pursuing their maximum employment mandate more aggressively.
These measures can prime our economy, but we will not truly unleash America’s growth potential until we deal with the still-lingering real estate debt overhang—modifying mortgages to relieve financial stress, keep families in their homes, and keep payments flowing to financial creditors.
For those who doubt how policy action can help our economy, take the Obama administration’s 2009 restructuring of the U.S. auto industry—which prevented two Detroit automakers from shutting down. Growing motor vehicles production accounted directly for 9 percent of economic growth in the second quarter after driving 36 percent of economic growth in the first quarter.
Like today’s GDP numbers, the outcome from not doing these things is predictable—more of the same and worse. The choice rests with policymakers in Congress or, if they fail to do the right thing, with voters in November.
Adam Hersh is an Economist with the Economic Policy team at the Center for American Progress. The team’s administrative assistant, Sam Ungar, provided research assistance.