In im­pla­ca­ble down­turn, arse­nal of re­cov­ery tools dwin­dling

Austin American-Statesman - - BUSINESS - By Tom Raum

WASHINGTON — Just when they might be needed the most, the res­cue ropes that hauled the nation out of the Great Re­ces­sion have be­come badly frayed.

A much-feared “dou­ble dip” eco­nomic down­turn would find in­ter­est rates al­ready slashed to near zero by the Fed­eral Re­serve and law­mak­ers leery of vot­ing for bil­lions of stim­u­lus dol­lars as they face re-elec­tion.

The govern­ment’s jobs re­port Fri­day added to the sense that the re­cov­ery is los­ing steam, sig­nal­ing that it could be years — not months — be­fore the em­ploy­ment rate re­turns to pre­re­ces­sion lev­els.

“We’re adding jobs — but at an ex­cru­ci­at­ingly slow pace,” said la­bor mar­ket econ­o­mist Heidi Shier­holz of the Eco­nomic Pol­icy In­sti­tute, a think tank. “Dou­ble dip or no, this is go­ing to be an enor­mously long slog.”

The tra­di­tional mech­a­nisms for blunt­ing eco­nomic pain and nur­tur­ing a re­cov­ery are ei­ther no longer avail­able or sim­ply not work­ing:

• Un­em­ploy­ment ben­e­fits for hun­dreds of thou­sands of Amer­i­cans are run­ning out or have al­ready ex­pired. Suc­ces­sive con­gres­sional at­tempts to ex­tend them anew have failed amid par­ti­san wran­gling on Capi­tol Hill.

• Lower taxes, of­ten used as a quick rem­edy for eco­nomic dis­tress, have al­ready been tried. Now taxes are prob­a­bly go­ing up. The spe­cial home­buyer tax credit ex­pired on April 30, and an ar­ray of in­come and in­vest­ment tax breaks — pushed through Congress by for­mer Pres­i­dent Ge­orge W. Bush — are due to ex­pire in 2011 with­out con­gres­sional ac­tion to ex­tend them.

• Mort­gage rates have sunk to their low­est level in more than five decades. That should be good news for the bat­tered hous­ing in­dus­try and put cash into the hands of home­own­ers as they re­fi­nance. But a wave of re­fi­nanc­ing hasn’t ma­te­ri­al­ized, as the many home­own­ers who owe more than their homes are worth can’t eas­ily do so.

• The Fed­eral Re­serve, in hold­ing a key short­term in­ter­est rate near zero per­cent since De­cem­ber 2008, can­not spur growth with fur­ther

rate cuts. Al­though there are other steps the Fed can take, such as di­rect loans, fur­ther in­creas­ing the money sup­ply or buy­ing mort­gage-re­lated se­cu­ri­ties, many such pro­grams al­ready have ended or are be­ing wound down.

• Fed­eral aid to cash-strapped states, in­clud­ing Med­i­caid grants and money to avoid lay­offs, is dry­ing up, and ef­forts by Pres­i­dent Barack Obama and his con­gres­sional al­lies to ex­tend and en­hance them have been thwarted by par­ti­san bat­tles in Congress.

Obama’s plea to stim­u­late eco­nomic growth now and cut deficits later got a mixed re­sponse from world lead­ers at the G-20 sum­mit in Toronto last week­end. And, with polls show­ing ris­ing con­cern among U.S. vot­ers over govern­ment red-ink spend­ing, Congress hasn’t been a whole lot more re­cep­tive.

The La­bor Depart­ment re­port showed the over­all job­less rate fell to 9.5 per­cent in June from 9.7 per­cent in May. But that was largely be­cause many peo­ple gave up look­ing for work, not be­cause em­ploy­ers added enough jobs to bring the rate down.

Econ­o­mist Mark Zandi, founder of Moody’s Econ­, said those un­em­ploy­ment num­bers “make me ner­vous. They show that the la­bor mar­ket is los­ing mo­men­tum. And right now, we’re in such a pre­car­i­ous sit­u­a­tion.”

Zandi said he thinks the econ­omy will con­tinue to grow, not slip back into re­ces­sion, “but it’s go­ing to be close,” es­pe­cially if Congress doesn’t come up with more help for states or ex­tend un­em­ploy­ment in­surance.

The re­ces­sion be­gan in De­cem­ber 2007, ac­cord­ing to the Na­tional Bureau of Eco­nomic Re­search, the group of aca­demic econ­o­mists that dates the be­gin­ning and end of re­ces­sions. The group has not yet an­nounced an end, al­though many econ­o­mists say the re­ces­sion prob­a­bly ended last sum­mer.

But the re­cov­ery may be be­gin­ning to weaken un­der the weight of con­tin­ued high job­less­ness, flag­ging con­sumer con­fi­dence and fears that Europe’s fi­nan­cial cri­sis will spread to the United States — or at least harm U.S. ex­porters.

“The eco­nomic re­cov­ery is clearly fal­ter­ing,” says Peter Morici, an econ­o­mist at the Uni­ver­sity of Mary­land.

And what if it falls into dou­ble-dip ter­ri­tory? “We stay there,” Morici said. “If we have a neg­a­tive quar­ter or two, we may not re­cover. The econ­omy just doesn’t have enough mo­men­tum this time.”

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