Bad policies to blame for tepid U.S. recovery

Raymond Keating
Raymond Keating

After four-plus years of a deep recession and poor recovery, there are those who can become excited when the economy merely muddles along at a below-average rate of growth.

That seems to be the case with some in their reaction to the recent release of the Federal Reserve Beige Book. The information gathered from the Fed’s 12 regional banks pointed to the economy from mid-February through late March continuing to grow at a “modest to moderate pace.”

During periods of recovery, real gross domestic product growth should expand robustly. Based on post-World War II history, real GDP should be growing in the 4.5 percent range. Overall, including recessions, the economy should be growing at better than 3 percent.

Unfortunately, since the recovery began in mid-2009, real GDP growth has averaged a mere 2.5 percent. From 2008 to 2011, real annual GDP grew by only 1.2 percent.

The same pretty much goes for job creation. It was reported in the Fed Beige Book: “Hiring was steady or showed a modest increase across many districts.”

Again, job creation numbers have been inconsistent and underwhelming during this recovery. According to the household survey, employment as of March was still

4.6 million below its peak in November 2007. That just over four years and four months.

The problem with our economy has been and continues to be policy.

On the fiscal side, it’s about federal spending careening out of control and tax increases, scheduled tax increases and the threat of even more taxes. It’s about hyper-regulation, including on the finance, health care and energy fronts.

But it doesn’t stop there. It’s also about misguided monetary policy in place since the late summer 2008.

The Fed has been focused on trying to use monetary policy to gin up the economy, which never works. Instead, it creates uncertainty and concerns over higher inflation. The value of the dollar suffers accordingly and energy prices, particularly the price of oil and therefore gasoline, rise as well.

For good measure, with interest rates purposefully pushed so low by the Fed, banks actually have real concerns about lending money since rates inevitably are going to rise, especially when inflation accelerates. Banks would then be caught in the position of extending long-term loans at extremely low rates while having to pay higher interest rates to pull in capital. That doesn’t work.

Modest to moderate economic growth simply doesn’t cut it. The American people need far better. Indeed, they can’t afford to settle for less than what we should be experiencing — robust growth with solid job creation. But that will require a shift in policy to lower taxes, smaller government, deregulation and monetary policy exclusively focused on price stability.

Indeed, if we don’t get a dramatic policy change, it’s doubtful that even “modest to moderate” growth can be sustained.