Thursday, May 6, 2010

IBD Editorial: America's Two-Tiered Recovery

From Investor's Business Daily online:

Economy: The recession is over, having ended last summer as we predicted, and now both parties will talk up recovery for different reasons. But it's not that simple. The private sector is only now getting back on its feet.

In March 2009, we predicted an imminent recovery from the brutal recession the U.S. entered in December 2007. It wasn't a tough prediction to make: The Fed had basically started printing money, pushing short-term interest rates to zero in late 2008 and causing the yield curve to go steeply positive.

An upward-sloping yield curve is in fact the most reliable indicator of a coming rebound. Given that, a recovery in GDP was baked into the cake well before the new administration took office.

Which is why we can only shake our heads as President Obama, House Speaker Pelosi, Senate Majority Leader Reid and other Democrats congratulate themselves for the turnaround.

If anything, their $862 billion stimulus and $700 billion corporate bailout, not to mention the $10 trillion in deficits projected over the next decade, have blunted the sharp rebound that would have created hundreds of thousands more jobs than we have now.

Yet Harry Reid has the chutzpah to accuse Republicans of "making love to Wall Street," a laughable claim given that his own party took twice as much from big Wall Street firms as the GOP.

Then there's Nancy Pelosi, touting her party's policies: "It is all about a four-letter word: jobs, jobs, jobs, jobs. We are all about jobs." Really, Madame Speaker? Since Democrats took control of Congress and the White House, we have had one financial meltdown, one steep recession and the loss of 8 million jobs, half of them in the last year alone.

OK, but didn't the economy start to recover last summer? Yes. But which economy are we talking about? The public sector is expanding rapidly and adding jobs. But that's come at the expense of the private sector, the economy in which most Americans live.

Far from recovering last summer, the private economy is only now emerging from its downturn (see chart). It suffered six straight quarters of year-over-year decline — the longest such string since the Depression. In the first quarter, it grew at a modest 2.8% — the first gain since 2008's second period. Hardly rip-roaring.

For those who call this a "V-shaped" recovery, we agree only to a point. Yes, the overall economy has retraced lost ground. But, again, private sector GDP, as the chart shows, tells a different story. It remains well below its peak in the fourth quarter of 2007. Indeed, even after the first quarter's gain, private output is still $233 billion, or 2.1%, below its previous quarterly high.

Better than anything, this explains why we've lost 8 million jobs since the recession began. And why it took until March of this year for the job market to actually start growing again.

In other words, the real economy continues to suffer — thanks to the incompetence of our government and its regulators. What matters isn't the public sector, which only consumes wealth. It's the private economy, where all wealth is created.

Debates over whether this recovery looks like a "V" or a "U" thus miss the point. Our concern is for the future of the private sector, which is grim if current trends continue.

The Fed has added $2.3 trillion to its balance sheet, while flooding the economy with more than $1 trillion in newly created dollars. This is a monetary stimulus the likes of which have never been seen.

What happens when the central bank starts to unwind it? The answer is, interest rates will rise sharply and the recovery will be derailed. This year we'll most likely see a decent rebound with 3% growth or more. But next year is anybody's guess.

The private economy faces so many other imponderables and potential pitfalls that it's safe to say this is the most uncertain period since World War II. What about the collapse of public finance around the world? The planned tax hikes on entrepreneurs? The coming 60% jump in capital gains taxes? What about the soaring new costs to pay for ObamaCare?

For a truly healthy economy, the private sector needs capital, entrepreneurial talent, fair regulation and low taxes. Most of all, it needs a governing class that recognizes that our country was built on free markets, not big government.

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