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Is the Economic Recovery for Real?
By: Dr. Charles Lieberman
Date: 5/3/2010
The upcoming employment report will help shed light on whether the economic recovery is sustainable. The pickup in consumer spending and business investment seen so far is very good news, but unless that spending translates into job growth, the gains in GDP will not last.
Attention remains riveted on Greece, where fiscal mismanagement and tax evasion are finally forcing change at a rapid and painful pace. One article reported that 324 Greek families in one Athens suburb acknowledged owning a pool on tax returns, while satellite photos revealed 16,974 pools. If you didnt know it, tax cheating is rampant in Greece. Greeks are learning that there is no free lunch and they will actually have to pay for their generous retirement and other social benefits. Loans at favorable rates from the rest of Europe will buy Greece time to implement the fiscal changes that are now unavoidable. Just as importantly, others in Europe, notably Spain, Portugal and the U.K., are also setting up for more budget cuts, since no one wants to follow the Greeks down the path towards rejection by the bond market. Thus, the economic recovery in Europe will be slow, as the expansion must overcome unfavorable fiscal conditions.
We also have budget issues in the United States, although they are not as problematical, yet. Our federal deficit appears to have peaked and should decline as the recovery gets stronger. California has reported that tax revenues are starting to improve. Even so, our federal and state governments have a long way to go and spending cuts and tax hikes will be necessary to bring these deficits down to manageable levels. This need not be done within a short period of time and would worsen the problem if it were done too quickly. Rather, as the recovery gathers momentum and tax revenues recover, fiscal policy will need to become gradually more restrictive.
The first key to the sustainability in the economic recovery is job growth. Without job growth, households will lack the income to increase spending and business would soon find that sales are weakening again. With job growth, households will have the means to finance higher levels of spending, which will force firms to boost output, which requires yet more hiring. Getting that virtuous circle going is the key to a sustained expansion. The early signs are excellent. But until we see a number of months of job gains, it is inappropriate to think the expansion is well established. Fridays employment report will provide critical information on whether the economy is on the right trajectory.
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