"Modest to Moderate" Growth Not Good Enough

After four-plus years of a deep recession and poor recovery, some can get excited when the economy merely muddles along at a below-average rate of growth.

That seems to be the case with some in their reaction to the release of the Federal Reserve’s Beige Book on April 11. The information gathered from the Fed’s 12 regional banks pointed to the economy from mid-February through late March continuing to grow “at a modest to moderate pace.”

During periods of recovery, real GDP growth should be expanding robustly. Based on post-World War II history, real GDP should be growing in the 4.5% range. Overall, including recessions, the economy should be growing at better than 3%. Unfortunately, since the recovery began in mid-2009, real GDP growth has averaged a mere 2.5%.

From 2008 to 2011, real annual GDP grew by only 1.2%.

The same pretty much goes for job creation. It was reported in the Fed Beige Book: “Hiring was steady or showed a modest increase across many Districts.”

Again, the job creation numbers have been inconsistent and underwhelming during this recovery. As of March, according to the household survey, employment was still 4.6 million below its peak in November 2007. That just over four years and four months!

The problem with our economy has been and continues to be policy.

On the fiscal side, it’s about federal spending careening out of control, and tax increases, scheduled tax increases and the threat of even more taxes. It’s about hyper-regulation, including on the finance, health care and energy fronts.

But it does not stop there. It’s also about misguided monetary policy in place since the late summer 2008. The Fed has been focused on trying to use monetary policy to gin up the economy, which never works. Instead, it creates uncertainty and concerns over higher inflation. The value of the dollar suffers accordingly, and energy prices, particularly the price of oil and therefore gasoline costs, rise as well.

For good measure, with interest rates purposefully pushed so low by the Fed, banks actually have real concerns about lending money since rates inevitably are going to rise, especially when inflation accelerates. Banks would then be in the position of having long term loans at extremely low rates, and having to pay higher interest rates to pull in capital. That doesn’t work.

Modest to moderate economic growth simply does not cut it. The American people need far better. Indeed, they cannot afford to settle for less than what we should be experiencing, that is, robust growth with solid job creation. But that will require a shift in policy to lower taxes, smaller government, deregulation, and monetary policy exclusively focused on price stability. Indeed, if we do not get a dramatic policy change, it’s doubtful that “modest to moderate” will even be sustained.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

SBE Council Chief Economist on Initial Jobless Claims

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), released the following statement in response to the latest initial jobless claims released by the Department of Labor:

"The second week in a row of seasonally adjusted initial jobless claims coming in at 351,000 is a clear plus. That's the lowest level since early March 2008. And the trend, though uneven, has been positive since mid-September of last year.

"While moving below the 400,000 initial claims level is important, it must be pointed out that during periods of solid economic growth, initial jobless claims generally run in the range of 270,000 to 330,000. So, we still have plenty of work to do.

"Our economic recovery remains uncertain, uneven and under-performing largely due to an adverse policy climate for business and investment. To return to robust economic and employment growth, there needs to be a shift from anti-growth tax, regulatory and government spending policies to a pro-growth policy structure of tax and regulatory relief, and smaller government."

FOMC's Economic Outlook: Far From Robust

In its statement released on January 25, the Federal Open Market Committee (FOMC) did not change its position on monetary policy.

Basically, the Fed's assessment is that the economy is growing moderately, with household spending up but business fixed investment slowing and housing still depressed. As for inflation, the Fed remains unconcerned. Looking ahead a bit on jobs, the Fed is looking for the unemployment rate to decline slowly.

But what was notable is the Fed's apparent expectation that a slow recovery will continue for the coming three years. Yes, that's three years.

Specifically, the FOMC statement declared: "[T]he Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

In Fed-speak, "accommodative" means the Fed is unconcerned about inflation, but worried that economic and employment growth will be lacking.

Looking at the new accompanying economic projections by FOMC members, the central tendency points to a range of real GDP growth for 2012 at 2.2%-2.7%, for 2013 at 2.8%-3.2%, for 2014 at 3.3%-4.0%, and the long range is put at 2.3%-2.6%.

Given that real annual growth since 1950 has averaged about 4.5 percent during recovery/expansion years, the Fed is working under the assumption that an under-performing economic recovery is going to persist for at least three more years. Indeed, real GDP growth, according to Fed expectations, is expected to run lower than the average 3.4 percent rate over the past six-plus decades including recession quarters.

Of course, monetary policy ultimately should be about price stability, and FOMC members naturally are projecting tame inflation. Why would we expect otherwise?

In the end, growth is about private sector investment, innovation, entrepreneurship and productivity. These certainly are affected by monetary policy and inflation - for example, in terms of interest rates, the value of the dollar and the ability to plan - but federal tax and regulatory policies are the measures that have significant and direct impact on incentives and therefore the economy. That's the job of the President and Congress, and according to Fed estimates, we need a dramatic shift in a pro-growth direction on taxes and regulations.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.