The 1.6% Recovery

To no one's surprise except perhaps Vice President Joe Biden's, second quarter economic growth was revised down yesterday to 1.6% from the prior estimate of 2.4%, which was down from first quarter growth of 3.7%, which was down from the 2009 fourth quarter's 5%. Economic recoveries are supposed to go in the other direction.


The downward revision was anticipated given the poor early economic reports for the third quarter, including a plunge in new home sales, mediocre manufacturing data, volatile jobless claims and even (after a healthy period) weaker corporate profits. Many economists fear that third quarter growth could be negative. Even if the economy avoids a double-dip recession, the current pace of growth is too sluggish to create many new jobs or improve middle-class living standards.

As recently as August 3, Treasury Secretary Timothy Geithner declared that this couldn't happen. "Welcome to the Recovery," he wrote, describing how the $862 billion government stimulus was still rolling out, business investment was booming, and the economy was poised for sustainable growth.

We all make mistakes, but the problem for the American people is that Mr. Geithner's blunder is conceptual. He and President Obama and their economic coterie really believe that government spending can stimulate growth by triggering private "demand," that tax rates are irrelevant to investment decisions, that waves of new regulation can be absorbed by business with little impact on costs or hiring, and that politicians can assail capitalists without having any effect on the movement of capital.

This has been the great Washington policy experiment of the last three years, and it isn't turning out too well. If prosperity were a function of government stimulus, our economy should be booming. The Fed has kept interest rates at near-zero for nearly two years, while Congress has flooded the economy with trillions of dollars in spending, loan guarantees, $8,000 tax credits for housing, "cash for clunkers," and so much more. Never before has government tried to do so much and achieved so little.

Now that the failure is becoming obvious, the liberal explanation is that things would have been worse without all of this government care and feeding. The same economists who recommended the stimulus are now producing studies, based on their Keynesian demand models, claiming that it "saved or created" millions of jobs, even as the overall economy has lost millions of jobs. The counterfactual is impossible to disprove, but the American people can see the reality with their own eyes.

The above table compares growth in the current recovery with the recovery following the recession of 1981-82, the last time the jobless rate exceeded 10%. The contrast is stark.

U.S. Treasury Secretary Timothy Geithner





Then after three quarters the recovery was in high gear. Now it is decelerating. Then tax rates were falling, interest rates were coming down and the regulatory state was in retreat. Now taxes are poised to rise sharply, interest rates can't get any lower, and federal agencies are hassling business at every turn. Then business investment was exploding. Now companies are sitting on something like $2 trillion, reluctant to take risks when they don't know what new costs government might next impose on them.

To borrow a phrase, maybe it's time for a change.