How Slow Can You Grow?
By Michael MaherMarch 23, 2012
Barely out of the Great Recession, the US economy has yet to prove it can sustain its fragile recovery.
In the Republican Party's excruciating ''elimination by a thousand cuts'' selection process for a presidential candidate, Mitt Romney is finally pulling away from his opponents. Big wins in Illinois and Puerto Rico have given him a 300-delegate lead over his nearest rival, Rick Santorum, and propelled him closer to the 1,144 delegates required to win his party's nomination.
Romney's cardboard-cut-out candidacy has hardly inspired the Republican base. In fact, he's one of the least popular frontrunners in recent memory. Apart from the furtive dog whistling about his Mormonism in the party's evangelical quarter, Romney's talking-mannequin persona and notorious flip-flopping have made him hard to embrace. But in a presidential election, which will hinge on the economy, and who is best to manage it, the man from Bain Capital — the successful private equity firm Romney co-founded - has more of the right stuff to contest the 2012 election than his fellow Republican aspirants.
With unemployment having dropped below the perilous 9 per cent mark and anemic growth levels just keeping the economy out of a double-dip recession, President Barack Obama is now in a better position to secure a second term. But after enduring the biggest economic downturn since the Great Depression, the question the American electorate (along with everyone else in the world) is asking is, how sustainable is this recovery?
The answer, as might be expected, is far from clear. Dr Mark Zandi, chief economist at Moody's Analytics, a division of Moody's credit rating agency, is among the optimists.
''I think it's sustainable,'' he predicts. ''I think the recovery is steadily evolving into a self-sustaining economic expansion — that we are now creating enough jobs to generate enough income to support enough spending to convince businesses to create more jobs. So I think the economy is entering into a virtuous cycle.''
However, Zandi warns that many things could go wrong, among them a spike in the oil price caused by tensions with Iran, new bouts of financial angst in Europe, and the ongoing foreclosure crisis in the United States.
Of a far less optimistic bent is Dr. Daniel Mitchell, a senior fellow at the avowedly free enterprise, Washington, D.C.-based think tank, the Cato Institute. ''I think the recovery is sustainable,'' he says, ''at least until we hit our Greek-style fiscal collapse, which is baked into the cake. And when I say that the recovery is sustainable, that assumes government won't do anything to screw it up — which is improbable.''
Mitchell is scathing about the reforms introduced to address the root of the economic crisis — the implosion of the finance sector. He argues the Dodd-Frank Act, implemented in 2010 and designed to reform Wall Street and protect consumers, ''has made things worse.
''We now have a much bigger problem of too-big-to-fail," according to Mitchell. "Now our financial sector is a little bit more corrupt and affected by cronyism than it used to be. Somehow we've got to put the toothpaste back in the tube and convince investors and other people in the financial sector that there are no more bailouts.''
Fresh concerns about the lack of reform on Wall Street emerged after a mid-level executive of the leading investment bank, Goldman Sachs, resigned in spectacular fashion. When 33-year-old Greg Smith published the reasons for his departure in The New York Times on March 13 he cited a continuing culture of greed and disdain for clients.
On Main Street, the prevailing response was one of, the more things change, the more they remain the same and renewed demands were made for deeper reforms to the finance sector. Mark Zandi, of Moody's Analytics, doubts those calls will be acted upon in the lead-up to the presidential poll.
''I think we're going to have to wait until after the election,'' says Zandi. ''But I think that's appropriate. I think the election to some degree is necessary to provide clarity with respect to precisely how we should address our problems and achieve fiscal sustainability. I think we've made a lot of progress, but we have to seal the deal. And I'm confident we'll be able to do that after the election.''
Confidence is not nearly as prevalent when it comes to the statistic which exercises Americans most: the national unemployment rate. Now at 8.3 per cent, few see that figure declining substantially in the near future.
According to Zandi: ''Full employment is probably somewhere between five and a half and six per cent, and even under the best scenarios we're not going to get back there until 2015, maybe even early 2016. So we've got a long road here, and it just goes to the severity of the recession we just went through.''
Daniel Mitchell agrees that the days of the natural rate of unemployment being down around the 4 per cent mark in the US are probably gone.
''I can't imagine even after we're fully out of the recession — and in theory we're supposed to be fully out of the recession but nobody actually thinks that way. But say our economy is fully recovered, however that's defined — I'd have a hard time seeing the unemployment rate getting down much under six per cent.''
The steady erosion of the United States's manufacturing base over the past few decades has meant a much greater dependence on the services sector to provide Americans with jobs. A mining boom in certain areas of the US is providing additional jobs in oil and gas-rich states, but it is anticipated growth in the services sector, says Mark Zandi, which is being relied upon to bring the unemployment rate down. ''Things like financial services, health care services, accounting services, educational services, architectural services, management consulting services, media, entertainment - all these things require a very skilled and educated workforce, and that's what the US has. And I think that's where those high-value jobs that will create a lot of wealth will come from.''
The creation of these new jobs will be dependent upon the economy starting to grow again. However, projected growth rates are hardly encouraging, and those like Daniel Mitchell, who tend towards pessimism, paint a picture of steady economic decline.
''I'm definitely pessimistic in the long run'' says Mitchell. ''We haven't had the normal strong bounce back that we've had from previous economic downturns, and I don't think there's any reason to expect that in the near future.
"We're not going to get that four, five or six per cent growth that you traditionally expect, and indeed I worry that we're going to have more like two per cent growth as the norm. Then, of course, just like Europe is toast, the US is going to be in deep trouble as well.''
Mitchell's view, as befits a senior fellow of the free enterprise Cato Institute, is that both the Bush and Obama administrations have burdened the economy with too much government control and created a system of corporate welfare that has stymied growth. Rest assured, this and other debating points will be discussed at length as the presidential election campaign proper gets underway in the coming months. Is the economic recovery sustainable? Fears of lapsing back into recession have subsided. But off that low base, few are predicting growth rates that offer unalloyed hope to economically hard-pressed Americans.