It’s becoming evident that rather than political gridlock, such as the congressional supercommittee’s obsession with spending cuts, we need to worry about economic growth and jobs. And there are some very good ideas on how to do that, such as in President Bill Clinton’s newest book, “Back to Work”. And economists such as Christina Romer, former Chairman of Obama’s Council of Economic Advisors, in a recent New York Times Op-ed are pleading with the Fed’s Ben Bernanke to actually target a growth rate that will both create jobs and keep inflation within a manageable range.
What? You mean the Federal Reserve’s QE-1, 2, and 3 buying of securities wasn’t doing just that? Well, no. It has accomplished the goal of keeping both short and long term interest rates low, but that hasn’t done anything for setting expectations of higher growth. In fact, the Fed just downgraded its own predictions of future growth. If anything, such low interest rates reflect deflationary expectations, which is the real problem. Companies won’t hire if they can’t raise prices, while consumers’ incomes fall in such an environment, stifling demand.
Dr. Romer and other major economists are beginning to insist the Fed should actually set what is called ‘nominal’ (i.e., before inflation accounted for) Gross Domestic Product growth target at the long term growth rate of around 5 percent. That way, expectations are raised for economic growth, without abandoning an inflation target of say, 2 percent, the current Fed inflation target.
How else can we boost demand for goods and services that is the actual driver of economic growth? We have discussed in a prior column how necessary it is for consumers—who power 70 percent of growth—to spend more, which in turn creates greater demand, which in turn creates more jobs in a virtuous circle. But they won’t if their confidence remains low, which surveys show causes them to spend less.
Former President Clinton has much more to say in “Back to Work” that directly addresses how to put Americans back to work, and he should know. “..during my administration we had four surplus budgets and began to pay down the national debt,” he says; we eliminated sixteen thousand pages of federal regulations; we cut taxes on the middle class, working families of modest means, and income from capital gains; we reduced the size of the federal workforce to its lowest level since 1960, and the economy produced 22.7 million new jobs.”
How did he do it? By emphasizing cooperation rather than competition between government and the private sector. “I believe the only way we can keep the American Dream alive for all Americans and continue to be the world’s leading force for freedom and prosperity, peace and security,” said Clinton, “is to have both a strong, effective private sector and a strong, effective government that work together to promote an economy of good jobs, rising incomes, increasing exports, and greater energy independence.”
Why is strong government so important? It is what engenders both business and consumer confidence, which are still at record lows. And without that confidence, consumers won’t spend to keep up demand, as we said, and businesses won’t hire in anticipation of higher growth.
Confidence from both the Conference Board and University Michigan surveys has remained at recession levels since 2008, really. And we know it a major reason for such low confidence is both political gridlock, and the S&P downgrade of U.S. Treasury bonds to AA+. This is what it means to lose confidence in our institutions, readers. Also, the subprime debacle that brought on the housing bubble caused a major loss of confidence in our Too Big To Fail financial institutions, which were allowed to gamble with their investors’ monies, and then be bailed out by taxpayer money.
But the confidence measures have stood in contrast to strength in consumer spending. If recent gains for confidence can be extended in the weeks ahead, the economic outlook as well as expectations for holiday shopping will improve. Some thawing in the jobs market may be helping with sentiment, says Econoday.
So confidence has to be restored in all of our institutions if we want to bring back economic growth. “What’s the smart, effective way to do that?” asks Clinton. “With a strong economy and a strong government working together to advance shared opportunity, shared responsibility, and shared prosperity? Or with a weak government and powerful interest groups who scorn shared prosperity in favor of winner take all until it’s all gone?”
Studies have shown that only by sharing prosperity can we really create strong economic growth. And right now we rank near the bottom in income inequality, according to the much cited CIA World Factbook. So there is a lot of work to be done to restore confidence in Americans’ future.
Harlan Green © 2011