U.S. Bureau of Economic Analysis chart on quarterly GDP growth, 2008-2012. (U.S. Bureau of Economic…)
It's been almost three years since the U.S. recession officially ended, but the country remains stuck in a roller-coaster economy. The table above from the Bureau of Economic Analysis says it all -- economic growth speeds up, then slows down, then speeds up, and now it's slowing down again.
It's as if there's some kind of invisible ceiling that we can't break through. What's worse, the ceiling isn't all that high -- GDP growth between 3% and 4%. If the United States is to recapture the low unemployment rates of the mid-2000s, before the subprime mortgage meltdown, it needs a sustained run of GDP growth that's solidly above 3%. In the first three months of 2012, by contrast, GDP grew a meager 1.9%.
The latest sign of the weakening economy came Friday morning, when the Bureau of Labor Statistics reported that the unemployment rate had ticked up again in May, from 8.1% to 8.2%. There have been some encouraging signs about the economy too, such as continued growth in auto sales and other consumer spending. But the unexpectedly low number of jobs created in May sent the markets tumbling, with the Dow falling 2.2% and dropping into the red for 2012.
What's the problem? In a nutshell, it's the unwillingness of businesses to expand, despite the record amount of cash (more than $1.2 trillion) they hold in reserve. Some economists argue that uncertainty about the federal budget and tax policy is holding them back, and that's got to be a factor. But there's also the lousy state of affairs in global markets -- recessions in Europe, slowing growth in China, the possibility of the Eurozone splintering, the specter of conflict with Iran -- depressing the outlook for the U.S. economy.
There's not much U.S. policymakers can do about the economic problems outside U.S. borders or the "headwinds" that President Obama cites so often. The one thing clearly in their control is U.S. fiscal policy, which is heading in a very dangerous direction. Unless Washington acts, the economy will be slammed early next year by huge tax increases and spending cuts, along with another debate over raising the debt ceiling that could weaken investors' faith in Treasury securities.
I've already noted the slim chance of Congress and the White House agreeing on a way to avert the looming crisis. There's also the chance that consumer and business confidence would plummet if Washington tried and failed to reach a deal on the expiring tax rates and looming budget cuts.
Nevertheless, if I were Obama, I'd publicly lay out a multiyear proposal with real entitlement cuts, spending restraints and, yes, tax increases (achieved not by raising rates but by weeding out exemptions, credits and deductions), modeled after the plan that the Senate's "Gang of Six" circulated last year. That would preempt a favorite argument by House Speaker John A. Boehner (R-Ohio): namely, that Obama refuses to lead on this issue. That would put the GOP back in the position of being the party of "no" and make taxes the focus of the debate -- and, probably, the November election.
As it is, the two parties are battling over small-beer proposals for jobs and the economy, such as Obama's "to-do list" and the House GOP's "Plan for America's Job Creators." Meanwhile, Obama and presumptive GOP nominee Mitt Romney trade accusations over each other's record as job creators (or rather, job destroyers).
Again, there's only so much influence Washington has over an economy that's increasingly integrated with those of other countries. Nor is it clear what role, if any, anxiety about future federal policies plays. But if Congress and Obama really want to boost confidence on that front, they'll reach a long-term deal to bring the federal debt swiftly under control and put the budget on a path to balance. The open question is whether it's worth risking what would happen in the likely event that the effort ended in failure.