Stop Worrying About Debt. Start Worrying About Growth
What is it with this economy? The Dow hits 14,000, the unemployment rate rises in January, and GDP actually falls in the last three months of 2012. Could it be that what's good for the stock market is bad for the rest of the economy? Could it be that captains of industry like weak labor markets, high unemployment, low wages -- and a Federal Reserve that has to use ultra-low interest rates to try to keep things afloat?
Well, yes, but the story is also richer and more complicated.
Basically, the economy is still weighted down by the legacy effects of the financial collapse of 2008 -- mortgages that exceed the value of homes, students staggering under the weight of college loans in a dismal job market, retired people for whom low interest rates mean low returns on savings, corporations looting pensions, and above all flat or declining wages.
It all adds up to a very weak recovery -- but the common element is insufficient purchasing power on the part of ordinary families. And this is about to be compounded by Fiscal Cliff II, namely Congress and the president deciding that what the economy really needs is a bracing dose of deflationary budget cuts.
What exactly happened in the last quarter of 2012 to cause the recovery not just to stall -- but to actually shrink the economy by a tenth of a point? According to the Commerce Department, there were multiple factors.
Exports slumped, business purchases to replenish inventory slowed, but here is the sentence that screams out: "Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third." In other words, cut government spending and you undermine a fragile recovery.