Will Obama, Fed tolerate another jobless recovery?

McClatchy NewspapersSeptember 16, 2009 

NEW YORK — Politicians, pundits and even the Federal Reserve chairman have declared the recession over, but what's coming next is likely to prove as vexing as the deep economic crisis that Americans hope to leave behind.

As the economy begins to grow again, the nation faces a huge challenge: Consumers drive roughly 70 percent of U.S. economic activity, but job growth is expected to be quite slow even as the recovery gains steam. Without a rebounding job market, consumer spending is unlikely to return to robust levels, slowing a return to full employment.

Think of it as America's chicken-and-egg dilemma: The economy needs a big jump in consumer spending to spur exceptional growth, but that won't happen as long as unemployment remains high.

Fed Chairman Ben Bernanke acknowledged this dilemma Tuesday when he predicted that growth next year would be moderate at best. The economy faces strong "head winds," he warned, raising prospects for a jobless recovery like the ones that followed the brief recessions in 1990-91 and 2001.

"Unless the economy grows significantly faster than its longer-term growth rate," which economists peg at about 3 percent annually, "it will be relatively slow in creating jobs over and above people coming into the labor force," Bernanke said. "And therefore the unemployment rate would tend to come down quite slowly. That's a risk, a possibility."

That's a problem for President Barack Obama, who's promised jobs, and for Bernanke, whose mission includes steering the economy to full employment. The unemployment rate, now 9.7 percent, is expected to rise above 10 percent soon.

They must find a way to encourage job creation to replace the more than 7 million positions already lost, plus about 1 million new entrants into the work force annually. To get back to an unemployment rate below 5 percent will require about 12 million to14 million new jobs.

"The problem here is that once the economy makes the turn, and once we're not only out of recession but out of this period that feels like recession ... even then the economy is not going to be growing fast enough consistently to bring down the unemployment rate," said Ken Goldstein, an economist with the Conference Board, a business research center in New York.

Absent significantly above-trend growth, Goldstein said, the unemployment rate is likely to remain stubbornly high, at around 8 percent by the end of 2011.

"It might be 2012 or 2013 before we're back below 6 (percent). We're certainly not going to go back to 4. We may not see 5 again. But to be in the 5.5 range, we could be there by mid-decade," he said.

That's 2015. If Goldstein is right, many Americans will continue struggling to find jobs or will be underemployed, and the economy is in for a long slog.

With credit markets still impaired and Americans likely to be offered less and more-costly credit for years, a period of higher-than-average growth appears unlikely. The U.S. economy probably isn't facing a return to the dismal 1970s, but it won't be like the roaring '80s and '90s either.

"It's going to feel uncomfortable compared to what we've enjoyed over the past couple of decades," said Mark Zandi, the chief economist for forecaster Moody's Economy.com.

Not all analysts are glum. James Glassman, senior economist and managing director at JP Morgan Chase, the nation's strongest large bank, thinks that the Federal Reserve and the Obama administration will do what it takes to improve the jobs outlook.

"We're going to have to grow faster than trend to get unemployment to come down, which means that it is going to happen — unless you believe zero (percent) interest rates don't matter," Glassman said in an interview at bank headquarters.

His logic goes like this: Because the Fed has held its benchmark interest rate near zero since last December and is expected to leave it there for quite a while longer, lending rates across the economy will remain unusually low as the Fed tries to engineer full employment, which economists consider to be when the jobless rate is around 5 percent.

"The economy is not going to have the same robustness that it normally has. Returning to 5 percent (unemployment) is a national goal. That means they are not going to take their foot off of the gas until they can see that coming into view," Glassman said.

"It doesn't take a brain surgeon to figure out that you should gun it to get the economy to full employment. And it's not a Republican idea or Democrat idea, because we've seen both the Bush and Obama administrations do it," he said.

However, banks aren't lending much right now despite the low rates as they recover from the recession and the toll it's taken on their balance sheets. Over time, however, economists think, bank lending will grow and low borrowing costs will stimulate economic activity by consumers and businesses, and one result will be job growth.

If unemployment remains intolerably high, the government could take further steps.

"I think policy measures can be used to generate a more robust recovery," said Lawrence Mishel, the president of the Economic Policy Institute, a liberal policy-research group. He favors extending unemployment benefits and more aid to states, effectively pumping up the existing $787 billion federal stimulus effort, since at least 15 states now have unemployment rates above 10 percent.

In a sign of the times, Mishel also sees a need for targeted public-works programs like those of the 1930s and temporary tax breaks for businesses that hire new workers, an idea that conservatives have championed.

"There are going to be distressed communities that are going to need jobs for years to come," Mishel said. "I think that these are really extraordinary times, and I think we need to do what we can to create jobs."

Obama doesn't think so at this point, however. In an interview this week with The New York Times, the president said he was leaning against seeking a second economic stimulus package. "I have a strong inclination not to do it," Obama said, citing expectations that the economy is poised to resume growth. "As you know, jobs tend to be a lagging indicator. They come last," he said.

ON THE WEB

Bernanke's speech Tuesday

Economic Policy Institute on labor turnover

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