Federal Reserve Chairman Alan Greenspan says the economy has hit a "soft patch." The recent flurry of bad news makes that pronouncement feel like quite an understatement. First, the 4-percent-plus growth we enjoyed for four straight quarters dropped to only 3 percent in the second quarter (April to June). Then came the news that only 32,000 jobs were created in July -- more than 100,000 less than we need just to keep up with population growth. Obviously, this news doesn't jibe with the White House message that "America's economy is strong and getting stronger." Just as obviously, the president will not take responsibility for the economy's poor performance or the policy choices that got us here.
Instead, we can expect more excuse-making. The question is, are the excuses valid?
The president says, "We've overcome a lot." For a while now, he's talked about "four hurdles" that have stood in the way of economic rebound: the stock-market collapse, September 11, corporate scandals, and the Iraq War. Let's take a brief tour of these excuses for the poor economic performance in recent years.
First, there was the stock-market collapse, starting in March 2000. True, this did hurt the economy, as those with less wealth did consume less. However, the rise in housing values, and the corresponding higher consumption, has since offset the effect of lower stock prices since 2000. Anyway, does anyone remember any conservative economists (or the president) in the late 1990s saying the stock market was overvalued? Or did they write books claiming the Dow Jones would go to 36,000?
The second hurdle was the attacks of 9-11. Certainly this event did hurt travel-related industries (such as airlines and hotels) and certain cities, most particularly New York. But is this a reason that the economy did not create jobs until September 2003? Airline travel has been more damaged by recessionary cutbacks in business travel than by cutbacks in personal travel due to fear of terrorism. There's no reason to believe that we would have more jobs in the summer of 2004 if the attacks nearly three years ago had not occurred.
A third hurdle, according to George W. Bush, was the corporate scandals. Of course, he and his friends had nothing to do with that and have always been vigilant about seeking corporate accountability and transparency. Shameless, huh? And there is not a lot of evidence that economic growth was marred much by these scandals, although they have affected stock values. Nevertheless, the stock market has rebounded since then, so it is hard to see any permanent damage to jobs or to the gross domestic product.
This brings us to hurdle No. 4, the biggest hoax of all: the claim that the war in Iraq is what's holding us back. Bush says, "Whether you're an employer or employee, you're not going to be all that optimistic thinking that that your country's marching to war." It is a legitimate argument to say that the war created uncertainties that may have slowed down investments and growth. However, did those investments and other opportunities disappear? Of any growth impeded by uncertainty, most of it was probably only delayed (perhaps until the president said, "mission accomplished"). Even more important, higher defense spending raised the GDP by 0.4 percent in 2003, far more than Bush's tax cuts to the rich (a 0.1-percent effect). It hardly seems that the war led to lower growth and is an apt excuse for our failure to create jobs.
The latest excuse for our sagging economic performance is rising energy prices. Like the others that came before it, this excuse has the ring of plausibility: It seems to make sense that higher oil prices would cut into consumer expenditures, thereby slowing growth. This latest excuse may walk like a duck, but in the end it's actually, well, just an excuse. Like the earlier excuses, it's an attempt to draw attention away from some key dynamics in the economy.
Let's take a look at whether energy prices can explain why consumption growth dropped 3.1 percentage points, from 4.1-percent growth in early 2004 to 1-percent growth in the spring.
A recent Goldman Sachs report tells us what we need to know. First, energy prices didn't just start rising; they've been going up for two and a half years. Yet consumer spending and growth accelerated in mid-2003 and didn't slow until recently. This means the “timing” of the energy price increases doesn't fit the pattern of consumer spending, providing "strong prima facie evidence against the view that energy prices are the primary reason for the slowdown."
Second, higher energy prices slowed personal income growth by, at most, 1.3 percentage points in the second quarter, not nearly enough to explain the 3.1-point drop-off in consumption growth. What's more, the energy price-induced slowdown in disposable income overstates the impact on consumption. That's because some people react not by consuming less but by saving less. The Goldman Sachs report suggests that the impact on consumption is only half the impact on income, or about 0.6 percent.
All in all, these excuses merely provide cover for poor performance and, in particular, Bush's ineffective policy choices. The president's repeated tax cuts did have an effect on growth and jobs; after all, throwing hundreds of billions of tax cuts at the economy has to do something. However, Bush's tax cuts for the rich raised the GDP in 2003 by just 0.1 percent, far less than the impact of the tax cuts on the middle class or the rise in defense spending. Better choices -- like aid to the states, one-time tax cuts aimed at lower and middle-income families, and extended unemployment insurance -- would have gained us 2 million more jobs by this year and left us with just half the fiscal deficit.
A major economic dynamic ignored by economic pundits, as well as both presidential candidates, is the surging trade deficit. Yet a rising trade deficit has clipped the GDP by 2.2 percent over the last four years (through 2003). In the first quarter of 2004, the GDP was 0.8-percent slower because of a larger trade gap, and the trade deficit was so high in June that Goldman Sachs estimates trade reduced growth by 1 percentage point in the second quarter. Our bipartisan establishment does not want to confront this trade problem, but it, more than energy, is what is undercutting growth.
Ignoring that problem, as the administration is doing, is, in a word, inexcusable.
Lawrence Mishel is the president of the Economic Policy Institute (EPI). He writes a bimonthly column with Jared Bernstein on economic issues for the Prospect's online edition.
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