On Sunday, August 22, the chairman of the President’s Council of Economic Advisors, Greg Mankiw, showed the Bush administration’s double standard on the economy. He argued that everything is rosy because of the president’s policies, but – just in case people noticed the weak economy and labor market – he added that if things were not so great, they were not the president’s fault. A closer look illustrates that the labor market indeed experienced the weakest recovery since the Great Depression, the economy is fundamentally unsound even without oil price hikes, and the administration’s irresponsible handling of the economy did little to efficiently alleviate the economic problems facing America’s working families.
There is little doubt that the labor market has seen a weak recovery in the past few years. For the first time since the Great Depression, the labor market continued to shed jobs well into the second year of the recovery. Consequently, by July 2004, more than three years after the recession started, the economy still had 1.2 million fewer jobs than at the start of the recession, and weekly earnings, in inflation-adjusted terms, had grown by a dismal 0.5 percent. That is not as bad as the Great Depression was, but it is worse than any recovery since then.
Even when the labor market showed signs of life, its pulse was only barely noticeable. In 32 months of economic recovery, employment growth, which is supposed to be above average during economic recoveries, had just one month that was above average, March 2004. Not surprisingly, then, average monthly employment growth since last August, when employment actually grew, was about 65 percent less than the average growth rate in the entire post-war period prior to this recession. And since its strong showing in March, employment growth has dropped continuously.
At the same time, price increases for many important household items have taken a bite out of families’ wallets. Prices for housing, for medical care, and for energy rose sharply. By June 2004, households spent a larger share of their disposable income on housing and medical care than they did at the start of the recession, and about an equal share on energy. Increased costs for basic items gobbled up any gains that households may have received from the president’s tax cuts.
Future cost increases are already projected. Most experts continue to expect prices for medical care to rise faster than inflation or wages in the foreseeable future. Also, given recent jumps in crude oil, prices at the gas pump could go up again. Additionally, large budget deficits, higher oil prices, and record trade deficits suggest that interest rates are more likely than not to increase. While the labor market recovery seems to be slowing, the demands on households’ incomes are rising.
The important last piece of the economic puzzle is that the administration has clearly acted irresponsibly in handling the economic problems that it faced. Instead of instituting a well-targeted, temporary economic stimulus, it pursued large permanent tax cuts that went predominantly to those households least likely to spend the extra money. Even worse, many tax cuts would not go into effect until well into the future, thereby worsening the budget outlook for the federal government without an effective economic stimulus in the present. The administration received a whimper for its really big bucks, rather than the bang that an efficient stimulus would have produced.
The lack of an effective economic stimulus, though, was not the only irresponsible step in handling the weak recovery. Despite evidence of continued job losses and the highest long-term unemployment in two decades, the administration hesitated in extending benefits to the long-term unemployed during the recovery and ultimately did not support further extensions in 2003, although long-term unemployment has remained high. Not only are many middle-class families facing large hardship, but the economy has also suffered since households who need help have less money to spend.
Largely because of the administration’s irresponsible policies, the economy is fundamentally unsound. The federal budget saw its sharpest deterioration in almost three decades following massive tax cuts, and households borrowed record amounts of new credit to maintain their consumption amid a weak labor market. Add to this a record trade deficit, and the economic picture looks anything but rosy.
The White House’s view of the world has little to do with reality. The economy is fundamentally unsound with record household debt levels, budget deficits and trade deficits threatening growth. Rising oil prices exacerbate these problems, but they are in no way the cause of the economy’s problems, as Greg Mankiw and other administration officials would like to lead us to believe. Instead of trying to reinterpret economic realities, the administration should take responsibility for its actions and forge a realistic plan that will avoid another recession in the near future. America’s working families have not yet reaped the benefits of this recovery, and they can ill afford a further slowdown.
Christian E. Weller is senior economist at the Center for American Progress.