Diagnosis: A Bad Loop

August 3rd, 2012 at 10:14 am

Though payrolls showed a bit more muscle in July—a very welcomed development if it persists—the expectation is for the economy to continue to slog along, slowly climbing out of the Great Recession.

The most frequently cited reasons for the continued weakness in the job market are Europe and budget uncertainty.  From this AM’s WaPo:

Given the government budget conflicts and the recession in Europe, the lackluster state of the U.S. economy seems likely to persist, economists said, and keep the economy in the doldrums.

From this AM’s NYT:

Economists are not expecting job growth to pick up much anytime soon. Concerned about the European debt crisis and the draconian American fiscal tightening scheduled for the end of the year, companies are starting to retrench.

Sure, those are real, ongoing concerns, though I think the extent to which budget madness—and yes, that’s a good description of the fiscal cliff—is slowing the economy is very speculative (not saying it’s nothing, but it’s pure anecdote).

I actually think the bigger story is the negative feedback loop between weak job growth, weak paychecks, weak consumer spending, weak demand, weak job growth—and you’re back at the start of the loop.

To break the loop, in the near term we need to target jobs, not debt and deficits.  Exhibit A in terms of proving that assertion, and from the perspective of what NOT to do, is Europe and the UK.  Fiscal policy, however, is frozen both there and here.

That leaves monetary policy, but even were the Fed willing to push harder, there’s a real concern they’re pushing on a string.  Their prime target is interest rates, and the cost of borrowing isn’t what’s holding back hiring.  That would be demand, and more of it would actually give the Fed’s policies more traction, which is why you constantly hear gentle Ben asking Congress for some fiscal help (i.e., jobs measures) to complement his team’s monetary juice.

But Congress isn’t listening, and therein lies the problem.

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4 comments in reply to "Diagnosis: A Bad Loop"

  1. celjr says:


    It is obviously a lack of demand in the economy that is causing it to lag. Austerity policies only exacerbate the problem by further reducing demand. There needs to be a focus on stimulus policies that target the middle class (such as payroll tax and further tax cuts for the middle class. We need to talk about “middle class stimulus” which may be more palatable than talking just about stimulus which many associate with quantitative easing and other policies that provide tax-payers dollars to banks.

  2. Michael says:

    Corporate profits are at record levels, and most Americans are taking it in the shorts. Sounds like the GOP is very, very happy.

  3. Kevin says:

    Of course you’re correct regarding the feedback loop. Why can’t the media ask one of these employers or economists for a specific example of a company with sufficient demand that requires it to add staff, yet not doing so because some bad macro-event may take place sometime in the future? Companies have no problem shredding workers when business (demand) drops – so it is counter-intuitive for them to fail to hire to meet higher demand. If demand was sufficient but there was a fear of the cliff or Europe, wouldn’t temp services be booming now?
    This repeated mis-information spewed by the media, who are acting as stenographers to their sources instead of informers to their audience, has a terrible effect on the knowledge of the electorate.
    I’m the CFO of a manufacturing company employing 300+ people. If our sales are expected to be impacted by some such event but meanwhile we can’t meet demand with existing staff, we’d bring in temporary help or hire & then fire if the predicted pain came to pass. We would not sit still and pass up business today for a potentiality tomorrow.