Vi­tal signs for global econ­omy: Not good

The Washington Times Weekly - - Commentary -

Is it pos­si­ble that we are al­ready in a global re­ces­sion but just don’t know it yet? And is the U.S. it­self — still the epi­cen­ter of the world econ­omy — stand­ing on the front edge of an­other re­ces­sion? I sin­cerely hope I’m wrong. But warn­ing signs are ev­ery­where.

The eu­ro­zone econ­omy is flat on its back. Greece may be headed for a po­lit­i­cal crackup and an exit from the euro and Euro­pean Union. De­posit runs in Greece and else­where are be­gin­ning, and a credit freeze through­out the con­ti­nent is not out of the ques­tion. Mean­while, emerg­ing economies like China, In­dia and Brazil are slump­ing.

Here at home, ex-Clin­ton strate­gists James Carville and Stan Green­berg sent a memo to Pres­i­dent Obama telling him that his cam­paign mes­sage of slow and steady re­cov­ery progress is out of touch with Main Street Amer­ica. They’re right. Of course, Obama’s “pri­vate sec­tor is do­ing just fine” state­ment is part and par­cel of his dis­con­nect from eco­nomic re­al­ity.

And the re­al­ity isn’t good. Whether you’re a Demo­crat or Repub­li­can, take a look at the num­bers:

Job growth has been slip­ping badly for three months. Re­tail sales and fac­tory or­ders are down two straight months. Real in­comes are flat. House­hold wealth is way un­der­wa­ter from the hous­ing col­lapse, drop­ping nearly 40 per­cent in the last three mea­sured years. And gross do­mes­tic prod­uct was an ane­mic 1.9 per­cent in the first quar­ter. Nearly all lead­ing Wall Street econ­o­mists are mark­ing down their sec­ond-quar­ter es­ti­mates to 2 per­cent or less.

But here’s the key point: 2 per­cent growth is not a re­cov­ery. Many econ­o­mists would call it a growth re­ces­sion. When you get that low, there’s lit­tle mar­gin for er­ror. A shock from Europe, an in­ven­tory sell­off in the U.S. or al­most any un­ex­pected event could push us back into neg­a­tive ter­ri­tory for an of­fi­cial dou­ble-dip re­ces­sion.

The last sav­ing grace for the U.S.? Busi­ness sales and prof­its are still trend­ing higher, although GDP-mea­sured prof­its did fall in the first quar­ter. That needs to be watched care­fully.

That said, a re­cent IBD poll shows that the num­ber of house­holds with at least one per­son look­ing for em­ploy­ment is 23 per­cent. That trans­lates to 30 mil­lion peo­ple look­ing for work. That’s not a re­cov­ery.

I can think of two ma­jor rea­sons for the lat­est eco­nomic stall — even inside an over­all re­cov­ery rate that’s only half the nor­mal pace of post-World War II re­cov­er­ies. First is the de­fla­tion­ary im­pact of a sharp, nearly 10 per­cent rise in the ex­change value of the dol­lar rel­a­tive to the euro. That’s im­part­ing a de­fla­tion­ary in­flu­ence on the econ­omy, where both im­port and pro­ducer prices have re­cently turned neg­a­tive. The good side of com­mod­ity de­fla­tion is that oil and re­tail gas prices have fallen con­sid­er­ably; the bad side is that man­u­fac­tur­ers may hold back pro­duc­tion and that debtors have to climb out of deeper holes.

As some­one who al­ways touts the mer­its of a strong King Dol­lar, why am I com­plain­ing now that we have one? That’s my sec­ond rea­son for the lat­est eco­nomic stall: King Dol­lar is not be­ing ac­com­pa­nied by lower tax rates.

The orig­i­nal sup­ply-side growth model ar­gued for a strong dol­lar and lower taxes, where the former keeps prices sta­ble and the lat­ter pro­vides fresh growth in­cen­tives. But in­stead of eas­ier taxes, a huge tax-hike cliff looms. Big prob­lem. Wrong model. Anti-growth.

As the Bush era tax cuts ex­pire at year end, so do the tem­po­rary pay­roll tax cut and the al­ter­na­tive min­i­mum tax patch. By some es­ti­mates, over $400 bil­lion in cash will be pulled out of the econ­omy in 2013, along with a roll­back of growth-ori­ented, mar­ginal-tax-rate in­cen­tives. It’s hard to quan­tify, but it’s quite pos­si­ble that busi­ness hir­ing plans and con­sumer­spend­ing ex­pec­ta­tions have been put on hold un­til folks can fig­ure out fu­ture tax pol­icy.

All this is why the tax-cliff prob­lem needs to be solved im­me­di­ately. If the tax cuts are ex­tended sooner rather than later, the econ­omy might straighten out faster than most folks think. But House Speaker John Boehner told me that while he’s ready to talk to Pres­i­dent Obama, the phone isn’t ring­ing. And while House Repub­li­cans are ex­pected to pass a tax-cut ex­ten­sion in July, it won’t go any­where with­out White House sup­port.

Un­for­tu­nately, the pres­i­dent is still talk­ing about tax hikes on the rich. He should lis­ten to Bill Clin­ton, who ar­gues for a full tax-cut ex­ten­sion to stop re­ces­sion. If we wait un­til af­ter the elec­tion to ad­dress the tax cliff, we will face un­cer­tainty and chaos, bring­ing us closer to re­ces­sion. Isn’t there some way to nip this worst-case out­come in the bud?

Lawrence Kud­low is a na­tion­ally syn­di­cated colum­nist.

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