Monday’s announcement by Standard & Poor’s that it was lowering its credit outlook for the U.S. government’s sovereign debt from stable to negative was a warning that no one should have needed. The seriousness of the federal debt problem and the dysfunction of our political process should be obvious to all. Sadly, it will probably take more than Monday’s credit warning to focus the minds and to steel the resolve of both parties to do what has to be done.
Recognizing the fragility of the recovery, economists in recent weeks have revised their forecasts downward for growth this year. Hardly anyone expected the kind of surge that propelled the U.S. economy from recession to strong recovery in 1983 and 1984, but this recovery has been particularly frustrating and slow. In the Blue Chip Economic Indicators survey of 53 top economists, the average forecast for growth in the 2011 gross domestic product dropped from 3.1 percent last month to 2.9 percent in the April survey; 38 of the 53 experts revised their predictions downward. Predictions for GDP growth in 2012 were revised downward as well, from 3.3 percent to 3.2 percent. These revisions are small, and few economists believe that we are headed for a double-dip recession, but the pessimism is a sure sign of the recovery’s weakness. The economy is flying barely above the treetops, and it has little margin for error.
It’s the skimming-the-treetops part that has many of the top financial experts worried. They see several linked problems—a mounting federal budget deficit is contributing to an unsustainable debt path, which is combining with an unwillingness or inability of elected officials to deal with it in a meaningful way, all during a fragile economic recovery. Toss in the challenge of raising the debt ceiling in a volatile political environment, and you can begin to understand the economists’ squeamishness.
The prospect of the financial markets crashing just as they are approaching the levels of three years ago is sobering, particularly for the baby-boom generation looking forward to retirement.
Two measures worth watching are the unemployment rate and gasoline prices. Although the overall unemployment rate has dropped to 8.8 percent, the broader and more politically telling “U-6” rate, which includes those working part-time but seeking full-time work and those who have given up looking for regular employment, is now at 15.7 percent. The Bureau of Labor Statistics estimates that 6.1 million Americans have been unemployed for 26 weeks or longer; a recent report by Nomura Global Economics suggests that 3.4 million are ready to start looking for work again (adding to the unemployment rate). Nomura points out that the longer people have been out of work, the more their job skills and relevant work experience have suffered; this makes them 2.5 times less likely to find work than a new entrant into the job market. Some economists thus worry that unemployment may get worse before it gets better. JPMorgan Chase’s chief economist, James E. Glassman, for example, is forecasting that the unemployment rate will return to 9.1 percent for the second and third quarters of this year.
Although most top economists do not fear a sharp increase in inflation in 2011 or ’12 for a variety of reasons, the underlying causes of sharply rising gasoline prices—political instability in the Middle East and North Africa, combined with growing demand for oil in China, India, and other rapidly expanding Third World countries—may be around for the foreseeable future. According to an American Automobile Association survey, regular-grade gas prices average $3.84 a gallon, up 98 cents a gallon from $2.86 less than a year ago. The politics of $4-a-gallon gasoline doesn’t need to be explained to readers of this column.
If the prospects of another financial crisis, a fragile economy, and continued high unemployment and gasoline prices don’t scare anyone whose name (or whose boss’s name) will be on the ballot next year, probably nothing will.
If you want a suggestion, here is one. The bipartisan, closed-door meetings that Vice President Joe Biden will chair to try to devise a deficit-reduction framework that could lead to a debt-ceiling increase are scheduled to start on May 5. Leaders in both parties should start now by muzzling the attack dogs, silencing the spinmeisters, and telling their members and staffers to stand down—to stop saying or doing anything that will strain the trust and willingness necessary on both sides and both ends of Pennsylvania Avenue to do what needs to be done. Lowering the partisan temperatures is a good start for creating the environment that can lead to compromise.
This article appears in the April 23, 2011, edition of National Journal.