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READ: Jay Prag, A Reality Check on the Road to Recovery

Published on Thursday, February 14, 2013


by Jay Prag

[From the San Bernardino Sun]
The recent economic reports surprised a lot of economists and their ensuing analysis confused everyone else.

Overall economic growth, as measured by the quarterly change in Gross Domestic Product, was negative, meaning that the economy actually shrank a bit in the fourth quarter. Confirming that, the Unemployment Rate ticked up a tenth of a percent last month.

The economic talking heads mostly said it was no big deal; colorful terms appeared: this was a hiccup or a bump in the road. But considering where we are, or at least where we claim to be, should the road really have any bumps in it now?

According to economic statisticians, we are on the third year of a recovery from a very bad recession. Lots of people wrote that this was the worst recession since the Great Depression. That's not true by objective measures, but it was a very bad recession nevertheless.

I find the decline in GDP in the fourth quarter of last year disconcerting. The fourth quarter of the year typically includes vast consumer spending associated with the holidays. This particular fourth quarter also included vast spending for the national election. So a decline is more than a surprise; it's a shock.

Since the end of the Second World War, there have been 17 Presidential-election fourth quarters. Fourteen of the seventeen years saw growth in GDP. Of the three that did not, the first was 1960. The other two were 2008, during the worst of this part recession, and 2012 during the so-called recovery.

In addition, we are in the third year of recovery since the end of the most recent recession. This recovery was stoked by a trillion dollars in stimulus spending and at least a trillion dollars in monetary easing. The highest quarterly growth rate we've seen during the recovery was 4 percent, which has occurred exactly twice in the twelve quarters of the recovery.

The most recent comparably recession was the Reagan recession at the beginning of 1981.

Unemployment peaked during that recession at 10.8 percent. During the Obama recession unemployment hit 10 percent. Reagan's recovery was hamstrung by very high inflation which eliminated any possible help from the Federal Reserve.

Still, in the three years after that recession ended at the beginning of 1983, quarterly growth exceeded 8 percent five times and it was never lower than 3 percent.

Whatever else people want to say about the disappointing news of negative growth in the fourth quarter of the third year of an economic recovery, it is not a good sign.

The current recovery has been tepid at best. I like euphemisms as much as the next economist but it's hard to say the economy is taking a breather when it hasn't been breathing very hard.

Some say that the government needs to spend more; more stimulus. Stimulus spending is intended to jump-start an economy. The assumption behind "fiscal stimulus" is that the economic fundamentals are sound we just forgot how to spend so the government has to remind us.

But this recession was not caused by forgetting anything. It was caused by a burst bubble. Too many resources were drawn into the housing sector by very badly thought out government policies.

Like other economic bubbles, it burst and the economy needed to reallocate those resources into other more sustainable sectors. That cannot be government spending. The government cannot employ tens of millions of people forever. To fix this economic problem with fiscal stimulus is to completely ignore the problem's origin.

The unevenness of this recovery is also worrisome. California still has nearly 10 percent unemployment.

Large states like Illinois, Michigan, and New Jersey are at or near 9 percent. It is well known that this recovery is being paced by Texas whose unemployment rate is close to 6 percent despite a large increase in their labor force over the past year.

But this very unevenness can be the answer that the economy needs. Policy makers don't need to guess.

Just look at the states that are doing a lot better than we are and emulate.

Honestly, how hard can this be to figure out for policy makers? In a 2012 CNN ranking of business friendly states, Texas came in second; California came in forty-sixth. Another 2012 ranking had Texas first and California last! Fix that.

No one wants the economy to struggle. But the biggest single drag on the US economy right now is California. As long as our policy makers continue to deny the effects of their decisions on our economy, we here in California will lead the country on a fitful path to economic recovery.



