More malaise ahead

We’re all waiting for the president’s promised Recovery Summer

The economy continues to be stuck in neutral, with no sign of relief ahead. The natural question is: How many more months and years of gloomy news reports must be endured until we admit the Obama administration’s borrow-and-spend policies have failed?
Other than a slight glimmer of hope in the housing market, economic indicators are grim. Federal Reserve Chairman Ben S. Bernanke, testifying before Congress Wednesday, reiterated the commitment for further action via monetary policy if the outlook doesn’t improve. Printing more greenbacks won’t be any more effective than the misguided stimulus which helped drive the national debt to its current $15.9 trillion level. Loose money might just add inflation to our woes.

The Fed’s Beige Book released Wednesday offered the most optimistic forecast of about 2 percent economic growth. The gross domestic product expanded 1.9 percent in the first quarter, but many experts think that the rate will slide in the third quarter, leaving us with 1.5 percent this year. That’s substantially down from last year’s 2.5 percent growth.
With the overall economy moving in the wrong direction, new jobs aren’t being created. In the last three months, a paltry 75,000 jobs were, on average, created each month. The number of Americans filing for unemployment benefits for the first time increased by 34,000 to a seasonally adjusted 386,000, according to the Labor Department. As of July 7, some 3.3 million without jobs were receiving state aid. That’s dampening spirits, as Commerce Department figures show retail sales dropped 0.5 percent last month. The only bright spot, relatively speaking, is the housing market, which finally seems to have bottomed out. There’s a decline in inventory and an increase in number of starts in the construction of new homes.
The Fed’s response has been to display its willingness to pump yet more money into the economy through a third round of quantitative easing. It has already extended Operation Twist, a swap of short-term securities for long-term securities. This manipulation is designed to drive down long-term interest rates in the hopes of jump starting the housing sector. Further quantitative easing supposedly will encourage businesses to borrow and invest with low interest rates.
This is a vain hope. Interest rates are already at historical lows. In fact, they’re so low that they barely cover the time risk, let alone the credit risk. That means lenders are going to only lend to people with outstanding credit. Most corporations are scared of what’s to come, sitting on large cash reserves, unwilling to invest because of uncertainty.
This reserve is a rational response to the slew of tax increases that will go into effect come 2013, unless Congress acts beforehand. In the face of fiscal uncertainty, in addition to the ongoing European debt crisis, neither easy money nor boosted spending is going to be a solution. Congress needs to act now to reduce the tax burden on businesses and entrepreneurs — the job creators — before the fragile economy slips back into a full-blown recession.