The num­bers speak vol­umes

The Washington Times Weekly - - Editorials -

Amid stel­lar first-quar­ter cor­po­rate earn­ings re­ports, which have pushed the Dow Jones in­dus­trial av­er­age to record lev­els and the more broad-based S&P 500 stock in­dex to near-record lev­els, the Com­merce De­part­ment re­ported April 27 that the econ­omy ex­panded at an ane­mic an­nual rate of 1.3 per­cent dur­ing the first quar­ter. It was the fourth con­sec­u­tive quar­ter of dis­ap­point­ing growth, fol­low­ing an­nu­al­ized growth rates of 2.6 per­cent in last year’s sec­ond quar­ter, 2 per­cent in the third and 2.5 per­cent in the fourth. The first quar­ter’s 1.3 per­cent growth rate, which was the slow­est in four years, also came in well be­low the con­sen­sus fore­cast of 1.8 per­cent.

One im­me­di­ate ef­fect was to re­duce the av­er­age an­nual growth rate of the Bush ex­pan­sion (the last 21 quar­ters, be­gin­ning with the first quar­ter of 2002) to a gen­er­ally unim­pres­sive 2.9 per­cent. More­over, if the an­nual growth rate for the cur­rent quar­ter comes in be­low 2 per­cent, then the av­er­age an­nual growth rate through­out the Bush pres­i­dency will have fallen be­low 2.5 per­cent. Th­ese are weak legacy num­bers, par­tic­u­larly com­pared to the 3.6 per­cent av­er­age yearly growth rate dur­ing the eight-year Clin­ton pres­i­dency, which in­cluded av­er­age an- nual growth greater than 4 per­cent dur­ing the last five years (1996-2000). In ad­di­tion, dur­ing the Clin­ton pres­i­dency, more than 22 mil­lion non­farm pri­vate­sec­tor jobs were cre­ated, re­flect­ing a monthly av­er­age of nearly 230,000, ac­cord­ing to the es­tab­lish­ment pay­roll sur­vey. That is four-and-a-half times the av­er­age monthly private-sec­tor em­ploy­ment in­crease of 51,000 dur­ing the Bush pres­i­dency.

Given the in­cred­i­bly ex­pan­sion­ary fis­cal and mone­tary poli­cies that have been pur­sued since the end of 2001, the rel­a­tively weak 2.9 per­cent growth rate dur­ing the Bush ex­pan­sion is quite puz­zling. Ac­cord­ing to the Na­tional Bureau of Eco­nomic Re­search, which is the of­fi­cial ar­biter of the U.S. busi­ness cy­cle, the 2001 re­ces­sion ended and the cur­rent ex­pan­sion be­gan in Novem­ber 2001. Dur­ing this ex­pan­sion, the na­tional debt has in­creased by more than $3 tril­lion, re­flect­ing an av­er­age monthly in­crease of $47 bil­lion, or $560 bil­lion per year. (The na­tional debt ac­tu­ally de­clined by more than $100 bil­lion dur­ing 2000.)

It’s hard to be­lieve, but mone­tary pol­icy ar­guably has been even more stim­u­la­tive than fis­cal pol­icy dur­ing much of the cur­rent eco­nomic ex­pan­sion. Dur­ing the first three years, from Novem­ber 2001 to Novem­ber 2004, the Fed­eral Re­serve kept the fed­eral funds in­ter­est rate at 2 per­cent or less. (The fed-funds rate, which is the in­ter­est rate banks charge each other for overnight loans, is the Fed’s tar­get rate over which it ex­erts the most con­trol.) For 20 months (from Novem­ber 2002 through July 2004) of that three-year pe­riod, the fed-funds rate was 1.25 per­cent or less, in­clud­ing a one-year pe­riod when it stood at a rock-bot­tom 1 per­cent.

Even when the Fed be­gan rais­ing its tar­get in­ter­est rate in June 2004, it did so at a leisurely pace that was un­prece­dented. For ex­am­ple, by the time the Fed raised the fed-funds rate to 4 per­cent in Novem­ber 2005, the con­sumer price in­fla­tion rate for the pre­ced­ing 12 months was 4.7 per­cent, re­sult­ing in a real (in­fla­tion-ad­justed) fed-funds rate of mi­nus 0.7 per­cent. It is amaz­ing: Four years into the ex­pan­sion, and the real fed-funds rate was still neg­a­tive. By way of com­par­i­son, the fed-funds rate bot­tomed out at 3 per­cent dur­ing the pre­vi­ous eco­nomic re­cov­ery, which fol­lowed a re­ces­sion that was as brief and as shal­low as the 2001 down­turn.

On top of the breath­tak­ingly stim­u­la­tive fis­cal and mone­tary poli­cies, the cur­rent ex­pan­sion has also been the benefi- ciary of a sig­nif­i­cantly de­clin­ing dol­lar, which has had the ef­fect of mak­ing U.S. ex­ports much cheaper than they oth­er­wise would be. The Fed com­piles a weighted, in­fla­tion-ad­justed bas­ket of “ma­jor cur­ren­cies” that cir­cu­late widely out­side the coun­try of is­sue. Among other trad­able cur­ren­cies, the bas­ket in­cludes the euro, the Cana­dian dol­lar, the Bri­tish pound and the Ja­panese yen (but not the Chi­nese yuan). Since peak­ing three months af­ter the cur­rent ex­pan­sion be­gan, the dol­lar has in­curred a real de­pre­ci­a­tion of 23 per­cent (through March) against the Fed’s bas­ket of ma­jor cur­ren­cies. Ab­sent this de­pre­ci­a­tion, it is fair to as­sume that Amer­ica’s trade deficit would be in sig­nif­i­cantly worse shape than its cur­rent dis­mal con­di­tion. By mak­ing U.S. ex­ports rel­a­tively cheaper, a de­clin­ing dol­lar acts as an ex­pan­sion­ary cat­a­lyst.

De­spite the un­prece­dented ex­pan­sion­ary poli­cies, the econ­omy has grown by only 2.9 per­cent per year since the re­cov­ery be­gan. Mean­while, the na­tional debt has in­creased by more than $3 tril­lion dur­ing the ex­pan­sion. And as the sub­par ex­pan­sion con­tin­ues, the Bush ad­min­is­tra­tion’s 2008 bud­get projects rais­ing the na­tional debt by an av­er­age of $550 bil­lion per year dur­ing the 2007-10 fis­cal pe­riod.

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