March 4, 2011, 1:48 p.m. EST
Source: Market Watch
Jobs news bright; economy still pressured
Commentary: Not enough economic activity to sustain growth
By Adam Hersh
WASHINGTON (MarketWatch) — Economy watchers breathed a long-overdue sigh of relief Friday morning. The employment report from the U.S. Department of Labor brought the brightest economic news in a long time.
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But we are still far from out of the woods. Extending this current three-month trend in jobs gains into the future means it would take the U.S. economy until 2033 to return to full employment, which economists generally believe is about a 5% unemployment rate. That’s why the positive indicators in Friday’s job numbers must be tempered with recognition of just how deep an economic hole we are still in. And that’s why House Republican plans to cut government spending are so dangerous — threatening our economy with a double-dip recession and risking the loss of nearly 1 million jobs.
The central problem crimping the living standards for working families is a lack of what economists call aggregate demand. There simply is not enough economic activity — investment and consumption by households, businesses, and government — to sustain sufficient employment growth. Back in 2007, the U.S. economy was running at near full capacity with only 5% unemployment. When the economy fell into recession in December 2007, activity slowed to 7.6% below potential, leaving a $1 trillion hole in demand.
The Recovery and Reinvestment Act of 2009, along with Federal Reserve policies to keep interest rates low, helped to narrow the demand gap, with 1.5 million private-sector jobs added since January 2010, and millions more workers never receiving pink slips. Even still, today an $825 billion demand shortfall remains in the U.S. economy. We won’t get back to full employment until this hole is filled.
Spending by households, business, or government that brings us closer to full capacity creates jobs. So who today has the capacity to spend? Households are leveraged to the hilt. Despite improving modestly in recent years, household debt still stands at 118% of after-tax income. Credit-card defaults and foreclosures remain high, rising gas and food prices are pinching family budgets, and the still-weak labor market conditions means eroding middle-class living standards. In the most recent data, median household income stood at $49,777, its lowest level since 1997.Some businesses are awash with cash. Corporations are sitting on a $2 trillion, and banks have nearly $1 trillion sitting idle at the Federal Reserve. Corporate profits have recovered to pre-recession levels, and corporate taxes paid are at near-historic lows.
But business investment is running at its slowest pace in any business cycle since the 1970s — not for lack of money but rather because of uncertainty about where sales growth will come from when demand from households is so fragile. In February, only 8% of small businesses thought it was a good time to expand; their dismal outlook is due to poor and uncertain economic conditions. Big businesses are more interested in using their resources for buying competitors through mergers and acquisitions than in making real job-creating investments, survey data from the Federal Reserve shows.
Which brings us to government spending. The $61 billion in funding cuts that the Republican-controlled House of Representatives approved by party line would slash federal programs that create jobs and economic growth now and in the future — such as K-12 education and critical infrastructure investments — as well as from programs that exist to help those hit hardest by the economic downturn, among them heating fuel assistance for low-income families. With 48 states eyeing fiscal contraction this year, Republican spending cuts just dig us deeper into the aggregate-demand hole.The question is not whether these cuts will hurt the economy, but how badly. Private economist and former Sen. John McCain advisor Mark Zandi estimates that cuts will cost 700,000 jobs. Federal Reserve Chairman Ben Bernanke testified this week that cuts may merely cost “hundreds of thousands” of jobs. And the Wall Street wizards at Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 157.27, +1.52, +0.98%) estimate these cuts will slow economic growth by up to 2 percentage points, pushing our economy back to the brink of recession.
None of these people are renowned bleeding hearts. But all agree that contracting aggregate demand now moves our economy in the wrong direction in terms of jobs and growth. Proponents of steep cuts argue that we can’t afford more spending, mistaken in the belief that cuts will boost growth.
The facts and more than 300 economists disagree.
Policymakers obviously need to focus on reining in the budget deficit in the long term, but not while the recovery and jobs still struggle to pick up speed. And certainly not by cutting investments in America’s future productivity and innovation.
Adam Hersh is an economist at the Center for American Progress.
