Lexington, KY - The labor market continues to be sluggish, with the unemployment rate rising another tick last month, and most anticipate another reduction in GDP for the second quarter when the figures come out later this month. We are clearly still in recession. Many are asking when it will begin to turn around and there are calls for more fiscal stimulus legislation. There are signs of the recession bottoming out, but, while the decline may halt, I continue to be worried about prospects for robust economic growth. And more fiscal "stimulus" won't help. In fact, it may do the opposite.
The present difficulties of the economy look to be the worst since the recession of 1981-1982 - and probably are even worse. At the onset of the '81-'82 recession, the last two quarters of 1981 had serious negative growth followed by three quarters of sluggishness. At that time, the unemployment rate went from 7.2 percent to 10.8 percent; an increase of 3.6 percent. The pattern of the current recession is different. It started with sluggishness in early 2008, followed by a small decline in GDP in the third quarter of 2008, followed by two quarters of large drops, and expected to be followed by another drop in the most recent quarter. Four consecutive quarters of negative GDP growth is serious indeed. Though the unemployment rate has not reached 10 percent, it is not far away at 9.5 percent, and many forecast that it will hit double digits. The increase over the past 18 months has been uncomfortably fast; it has gone up 4.6 percent since January of 2008 (from 4.9 percent to its present 9.5 percent).
While both GDP and unemployment numbers continue to show a slide, the rate of decline seems to be slowing, leading to the strong possibility of a bottoming out. But will there be a robust recovery? The performance of the stock market is usually a good indicator of this. After all, the value of stocks represents not just today's earnings, but the prospects of future earnings and returns on investments. The strong, steady increases posted by the stock market in the latter part of 1982 foretold of a robust recovery. But it's the behavior of today's stock market that gives me cause for present concern. The Dow Jones Industrial Average fell drastically in the fall of 2008 and winter of 2009 to close below 7,000. It recovered somewhat and has hovered between 8,000 and 8,500 over the past three and a half months. This stagnation strongly suggests that prospects for growth in the economy at large are not that good.
Do we need another shot of fiscal stimulus? My answer is an emphatic "no." Keynesian-leaning economists argue that fiscal stimulus is important to help an economy out of a recession. I, and many other economists, dispute this for a number of reasons. But even if you believe the Keynesian prescription, a necessary condition for it to work is that the money has to be spent, and spent quickly. This is simply not happening. Of the $787 billion deficit plan enacted by Congress, the Congressional Budget Office estimated that $185 billion would be incurred this fiscal year. Of the appropriated outlays, about $37 billion had been spent by May 22 of this year. Even if you're a dyed-in-the-wool Keynesian, it doesn't do any good for Congress to appropriate a lot of stimulus money if it doesn't get spent. Calling for more stimulus doesn't help.
For non-Keynesians like me, a real problem with deficit spending is that it means more taxes later. So more stimulus spending just adds to the worries about future levels of taxation and, with high enough deficits, concern that inflation may ultimately finance it. Unfortunately, it looks like we are approaching this level of spending. With worrisome future prospects, it's not a surprise that the stock market is not bullish.
On top of this, there are concerns regarding prospective legislation to cap carbon emissions and remold our healthcare system. If passed, the carbon cap bill is likely to be very expensive with little impact on worldwide carbon emissions, nor on the global climate. In other words, it's all cost and no benefit. Healthcare reform is forecast to be well more expensive than the administration had hoped (though not unexpected by others), compounding the usual inefficiency problems of large-scale, government-administered programs. This is not an environment leading to stability and confidence in the future. There are just too many uncertain and ill-conceived policies floating about. In my view, to get a strong recovery, it's important to have relief from these burdens.
John Garen is department chair and Gatton Endowed Professor of Economics at the University of Kentucky.