Decline by design - Asia Times Online

Decline by design
By Peter Morici

Forecasters expect the US Labor Department on Friday to report the economy added only 67,000 jobs in August - my estimate is 63,000. Either would be much less than the 130,000 the economy must create each month to stay even with adult population growth.

Overall, gross domestic product (GDP) and employment are growing more slowly than the population, and the private sector is much smaller than before the recent Great Recession, even with big boosts in federal spending on private health-care services and federal mandates for similar outlays by the states.

Employment grew in the second and third quarters despite very slow GDP growth, because labor productivity fell the first half of 2011. Consequently, real wages, per capita income and living

 
standards are dropping - all exacerbated by hungry state and local tax collectors who refuse to tighten belts as quickly as households and businesses.

A downsizing private sector, falling productivity per capita GDP, and a shrinking share of the adult population employed or even seeking employment are ominous signs of economic decline.

Recent economic data - retail sales, consumer spending, surveys of business sentiment, and housing/auto market activity - indicate an economy in neutral, and one that could slip into permanent stagnation or recession.

Near term, employment in healthcare, retail, and manufacturing should post modest gains, and construction may exhibit some bounce, because it fell to such low levels during the recent recession.

State and local governments will continue to shed jobs because state payments for Medicaid services are rising too rapidly and a downsized private sector generates too few tax receipts - together those shrink resources available for other public services.

The economy must add 13.9 million jobs over the next three years - 386,000 each month - to bring unemployment down to 6%. Considering layoffs at state and local governments and likely federal spending cuts, private sector jobs must increase at least 400,000 a month to accomplish that goal.

Growth in the range of 4 to 5% is needed to get unemployment down to 6% over the next several years. Recent GDP data put first-half growth at less than 1% .

Jobs creation remains weak, because temporary tax cuts, stimulus spending, large federal deficits, price raising health care mandates, and tighter but ineffective business regulations do not address, and indeed exacerbate, the permanent structural problems holding back dynamic growth and jobs creation - dysfunction energy and trade policies that cause a huge trade deficit.

Oil and trade with China account for nearly the entire $600 billion trade deficit. This deficit is a tax on domestic demand that erases the benefits of tax cuts and stimulus spending.

Simply, dollars sent abroad to purchase oil and consumer goods from China, that do not return to purchase US exports, are lost purchasing power and cannot be spent on US made goods and services. Consequently, the US economy is expanding at less than 1% a year instead of the 5% pace that is possible after emerging from a deep recession and with such high unemployment.

Also, America is not playing its advantages well. Strengths in finance, telecom and backbone technologies, pharmaceuticals, aerospace and autos, and other industries are not generating exports as much as those are creating offshore jobs. Mass layoffs recently announced in these sectors bode poorly.

Without prompt efforts to produce more domestic oil, redress trade imbalance and better regulatory and industrial policies, the US economy cannot grow and create enough jobs.

Weak demand, excessive and ineffective regulation, and the generally pessimistic outlook offered by Treasury Secretary Geithner and White House advisers depress consumer and business confidence.

The appointment of Alan Krueger to head the Council of Economic Advisors indicates business can expect continued emphasis on new spending, taxes, cumbersome regulation, and limits on domestic energy production, and few effective efforts to confront Chinese mercantilism or generally improve US trade competitiveness.

Until this policy direction is altered, the economy will continue to grow slowly or slip into recession, unemployment will rise, living standards will fall, and American standing in the global economy will decline.

An American policy of decline by design!

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the US International Trade Commission.

31 Aug, 2011


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