This morning’s US employment report shows that July was the 34th consecutive month of job increases. Earlier in the week, the Commerce Department report showed that the 2nd quarter was the 16th consecutive quarter of positive GDP growth. Of course, the growth rates in employment and income have not been anywhere near as strong as we would like, nor as strong as they could be if we had a more intelligent fiscal policy in Washington. But the US economy is doing much better than what most other industrialized countries have been experiencing. Many European countries haven’t even recovered from the Great Recession, with GDPs currently still below their peaks of six years ago.
US job growth has averaged 186 thousand per month over the last two years, or 167 thousand per month over the last three years. Most people are aware of the improvement relative to the horrendous job loss during the 2008-09 recession. But they are probably not aware of how the recent recovery record looks compared to the previous business cycle, the six years of recovery between the end of the 2001 recession and the economic peak at the end of 2007. Job growth during those six years averaged 100 thousand per month, substantially lower than now. The difference is even greater if one looks at private sector jobs numbers, because government employment expanded substantially under the Bush Administration whereas it has been contracting in recent years.
GDP growth has fallen well below 2% in the last three quarters. But I think we know the reason for that: dysfunctional fiscal policy. Washington has been the obstacle to a normal robust recovery, through a combination of such factors as spending cuts since 2011, the expiration of the payroll tax holiday in January 2013, the sequester in March, and now business uncertainty arising from new time-bombs in the next two months, once again the needless result of partisan deadlock over passing a budget and raising the debt ceiling. Given all that, it is surprising that private consumption and investment have held up as well as they have.
The right policy bargain, of course, is fiscal stimulus in the short term, not fiscal contraction, combined with steps today to address the entitlements problem in the long-term. That would get us back to solid growth. Our current pattern of pro-cyclical fiscal policy is exactly backwards.
[Comments can be posted at the Project Syndicate site or at Economist’s View. I have been appearing on Fox Business, where Stuart Varney again today asked why we aren’t achieving high growth. He also worries about the recent increase in part-week employment, apparently not realizing that this is an effect of the government sequester.]