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 such as China, India and Brazil are slumping.
Here at home, ex-Bill Clinton strategists James Carville and Stan Greenberg sent a memo to President Barack 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 sell-off in the United States or almost any unexpected event could push us back into negative territory for an official double-dip recession.
The last saving grace for the United States? 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, more than $400 billion in cash will be pulled out of the economy in 2013, along with a rollback of growth-oriented, marginal-tax-rate incentives. It’s hard to quantify, but it’s quite possible that business hiring plans and consumer-spending expectations have been put on hold until folks can figure out future tax policy.
All this is why the tax-cliff problem needs to be solved immediately. If the tax cuts are extended sooner rather than later, the economy might straighten out faster than most folks think. But House Speaker John Boehner told me that while he’s ready to talk to Obama, the phone isn’t ringing. And while House Republicans are expected to pass a tax-cut extension in July, it won’t go anywhere without White House support.
Unfortunately, Obama is still talking about tax hikes on the rich. He should listen to Clinton, who argues for a full tax-cut extension to stop recession. If we wait until after the election to address the tax cliff, we will face uncertainty and chaos, bringing us closer to recession.
Isn’t there some way to nip this worst-case outcome in the bud?
— Larry Kudlow National Review Online’s economics editor, is host of CNBC’s The Kudlow Report and author of the daily web blog Kudlow’s Money Politic$. Click here for more information, or click here to contact him.
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