Skeptic Project

Double dip is not a term that a government keen to extricate itself from the economic-crisis-management business likes to hear. A couple of weeks ago, the Obama Administration was poised to switch to growth mode. Then the ugly data started pouring in like the overflowing Mississippi. First-quarter GDP numbers showed a measly 1.8% increase, well short of the expectations of above 3%, and second-quarter estimates are not much better. Then came a report on housing-price declines that have not been seen since the Great Depression, followed by reports of consumer spending at six-month lows and weak manufacturing surveys. The worst was unemployment figures to make you cry: a mere 54,000 jobs were created in May, less than half of what was expected and less than a third of what is needed to lower a 9.1% unemployment rate.

You can hardly blame Council of Economic Advisers head Austan Goolsbee for picking this moment to retreat to his tenured university post in Chicago. The professor tried to put a good face on things, brushing away worries of a double dip and citing stiff but temporary "headwinds" from such factors as the Japanese-nuclear-disaster-related supply shocks and higher gas prices. Fed Chairman Ben Bernanke was somewhat more sober, admitting that the recovery was proving to be "uneven" and "frustratingly slow." Yet he gave no hint of being willing to helicopter in a third round of fiscal stimulus — at least not yet. "Monetary policy," he said, "cannot be a panacea." Or as Goolsbee put it, it's time for the private sector to "stand up and lead the recovery." (See what Goolsbee's resignation means for the economy.)

If only. There may be $2 trillion sitting on the balance sheets of American corporations globally, but firms show no signs of wanting to spend it in order to hire workers at home, however much Washington might hope they will. Meanwhile, the average American is feeling poorer by the week. "If one looks at unemployment and housing, it's clear that for all practical purposes, we have yet to fully get out of recession," says Harvard economist Ken Rogoff, summing up what everyone who doesn't live inside the Beltway Bubble is thinking. While the White House's official 2011 growth estimate, locked in before Japan and the oil shock, is still 3.1%, most economic seers are betting on 2.6%. That's not nearly enough to propel us out of an unemployment crisis that threatens to create a lost generation of workers who can't find good jobs and may never find them. Welcome to the 2% economy.

While the Administration is taking a sort of "move along, nothing to see here" approach, Republicans are trying to pin every economic problem on Obama in the run-up to the 2012 election. Let's be clear: the slow growth the U.S. is experiencing is not an Obama-specific problem. Many of the ingredients in it were already baked into the economy and were simply laid bare by the financial crisis. According to research by Rogoff and economist Carmen Reinhart, it takes four years after a financial crisis just to get back to the same per capita GDP level you started with, and there's no doubt things would have been dramatically worse had the Administration not taken all the action it did in the wake of the crisis. (See "Is a Double Dip Becoming More Likely?")

But at the same time, the growth problem is Obama's. Every President inherits his predecessor's economy; indeed, it's often what gets him the job. It's then up to the new guy to change the numbers as well as the debate. Now it looks as if Obama is losing that debate. The Republicans have pulled off a major (some would say cynical) miracle by convincing the majority of Americans that the way to jump-start the economy is to slash taxes on the wealthy and on cash-hoarding corporations while cutting benefits for millions of Americans. It's fun-house math that can't work; we'll need both tax increases and sensible entitlement cuts to get back on track. Yet surveys show 50% of Americans think that not raising the debt ceiling is a good idea — that you can somehow starve your way to economic growth.

See how the recession changed young people's attitudes about money.

See "A Flight Plan for the American Economy."

No wonder the rest of the world is so worried about our future. Sadly, other regions won't be able to help us out, as happened in 2008. Europe is in the middle of its own debt crisis. And emerging markets like China, which helped sustain American companies by buying everything from our heavy machinery to our luxury goods during the recession, are now slamming on the growth brakes. Why? They're worried about inflation, which is partly a result of the Fed's policy of increasing the money supply, known as quantitative easing. Much of that money ended up in stock markets, enriching the upper quarter of the population while the majority has been digging coins out from under couch cushions. Investor money also chased oil prices way up (which hurts the poor most of all) and created bubbles in emerging economies. Now these things are coming back to bite us.

All this sounds complicated, and it is. But it's important to understand that our economy has changed over the past several decades in important and profound ways that politicians at both ends of the spectrum still don't get. There are half a billion middle-class people living abroad who can do our jobs. At the same time, technology has allowed companies to weather the recession almost entirely through job cuts. While Democrats may be downplaying the bad news, Republicans, obsessed with the sideshow that is the debt-ceiling debate, haven't offered a more cohesive explanation for the problems or any real solutions. Rather, both sides continue to push myths about what's happening and how the economy will — or won't — recover. Here are five of the most destructive myths and why we need to figure out a different path to growth. (See "Will Banks Target the Unbanked Next?")

Myth No. 1: This is a temporary blip, and then it's full steam ahead
True, only 12.2% of economists surveyed in the past few days by the Philadelphia Fed believe that the current backsliding will develop into a double-dip recession (though that percentage is up significantly from the start of the year). Avoiding a double dip is not the same as creating growth that's strong enough to revive the job market. In fact, there's an unfortunate snowball effect with growth and employment when they are weak. It used to take roughly six months for the U.S. to get back to a normal employment picture after a recession; the McKinsey Global Institute estimates it will take five years this time around. That lingering unemployment cuts GDP growth by reducing consumer demand, which in turn makes it harder to create jobs. We would need to create 187,000 jobs a month, growing at a rate of 3.3%, to get to a healthy 5% unemployment rate by 2020. At the current rate of growth and job creation, we would maybe get halfway there by that time. (See the upside of a double dip.)

Myth No. 2: We can buy our way out of all this
While a third round of stimulus shouldn't be off the table in an emergency (Obama has already indicated it's a possibility if things get much worse), the risk-reward ratio isn't good. For starters, our creditors — the largest of which is China — would squawk about the debt implications of doling out more money, not to mention the risk of creating hot-money bubbles in their economies. That's almost beside the point, though, because the stimulus — which has taken the form of Fed purchases of T-bills designed to reduce long-term interest rates and make homeowner refinancing easier — isn't much help if homeowners don't have jobs that allow them to make any payments at all. Although foreclosures are declining, the supply of foreclosed homes for sale is undermining the real estate market, which is dampening consumer spending and sentiment. "It's time to move beyond financial Band-Aids," says Mohamed El-Erian, CEO of Pimco, the world's largest bond trader. "It's clear that the stimulus-induced recovery hasn't overcome the structural challenges to large-scale job creation."

Myth No. 3: The private sector will make it all better
There is a fundamental disconnect between the fortunes of American companies, which are doing quite well, and American workers, most of whom are earning a lower hourly wage now than they did during the recession. The thing is, companies make plenty of money; they just don't spend it on workers here.
http://www.time.com/time/printout/0,8816,2076568,00.html