Economic turnaround? This economist says yes

This article appeared in the Patriot News, April 27, 2010.

When, after the latest unemployment report came out, I mentioned to a colleague that things were finally starting to look up, he wondered whether I was being Panglossian.

Pangloss, you may recall, is the character in Voltaire’s satire “Candide” who argues that we live in the best of all possible worlds. The title character of the novel subscribes to this optimistic philosophy with such vigor that it takes a series of harrowing personal misfortunes to cause him to reconsider his blinkered outlook on life.

So is my colleague’s gentle rebuke merited? Am I being Panglossian? After all, unemployment is stuck at 9.7 percent, with little likelihood that it will fall to around 6 percent (what most economists believe to be America’s “full employment level”) in the next several months.

Compounding the problem, average hourly wages fell in March, meaning even if you still have a job, the money might not be going as far. Housing prices are yet to recover from their protracted slump, while the specter of further foreclosures remains a grim possibility. Translation: housing, a major component of household wealth for most Americans, is unlikely to increase significantly in value in the near future.

Yet signs of an economic recovery are becoming increasingly visible. In March, the economy added 162,000 jobs, the gains coming from temporary-help services, health care and manufacturing. Yes, manufacturing. Since the beginning of the year, the manufacturing sector has quietly added 45,000 jobs.

The country’s output of goods and services has been rising at a decent clip. After posting a 2.2 percent gain the third quarter of 2009, gross domestic product has risen by an even more robust 5.6 percent in the fourth.

Inflation is practically non-existent, as firms grapple with excess capacity and diminished pricing power. In March, the consumer price index rose a scant 0.1 percent, leading to fears that deflation, rather than inflation, might be the thing to worry about. Labor productivity continues to rise sharply, further restraining inflationary pressures.

All of this makes the job of the Fed and its chairman, Ben Bernanke, easier. Since Bernanke doesn’t have to worry about incipient inflation, he can keep interest rates low for more time, providing further impetus to business investment. The stock market has responded forcefully. The Dow has topped 11,000, a level not reached since late 2008.

The Obama administration can claim some credit for this turnaround. The fiscal stimulus package of $787 billion, which comprised tax cuts, spending increases and payments to state and local governments, has served to counter the substantial decrease in private sector spending that occurred in the aftermath of the bursting of the housing and financial market bubbles.

Less than a year ago, the economic picture looked unremittingly bleak. Problems still remain, notably the sharply higher federal budget deficit, and the parlous state of finances of state governments everywhere. But few, even those with a Panglossian bent, would have foreseen the improvements that have occurred since.

The revival in the fortunes of the United States is in stark contrast to the anemic picture across the Atlantic.

In recent weeks, the European Union (and the euro) has come under strain as Greece faces the dire prospect of default on government debt. After frenzied deliberations, primarily with Germany, Greece has been promised financial help from the European Union and the International Monetary Fund. But the offers of help come with strings attached. Greece must agree to drastic reductions in its budget deficit.

But this requirement comes at precisely the wrong time. For a country battling a recession, reducing the budget deficit will require a combination of lower government spending and higher taxes.

With rising unemployment almost an inevitable outcome, each of these policies threatens to hinder recovery in Greece’s economy. Those who advocate similar efforts to rein in the U.S. budget deficit now should take heed.

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