Economic Recovery and Opinion and Economic Analysis and Economy and Banking & Finance

HICKS: Expectations can't erase sluggish recovery

August 14, 2010

If you have been paying close attention to the economic news of late (an activity this doctor wouldn’t recommend), you have read more than a bit of unsettling news. This is especially true if you pay close attention to online news services that treat economic data announcements like a horse race.

There are, however, some unpleasant data that cannot be erased by much good news over the past few months. Most significantly, while the economy continues to recover, the pace is agonizingly slow. The reasons for this are becoming clear.

First, the bubble that burst wasn’t just in housing and financial markets, but also in labor markets. A number of workers—perhaps one in 20—are without work because the firm or industry they were in was failing, or they themselves are now dimly valued by the labor market. Most of these folks don’t live in places where they can get jobs and therefore face a costly job search, relocation and retraining. Virtually all of us go through this once or more in our lives, but this lack of rarity doesn’t make it less unpleasant. It will simply take some time to sort out.

Second, investor confidence has been riddled by uncertain federal policy. Some of this is the fault of current lawmakers, and some of it is simply unhappy timing. For example, no matter what you think of the Bush tax cuts, their imminent expiration means virtually all working households and all small businesses are facing large tax hikes come Jan. 1. This will cut demand for consumer goods and services, and businesses know it. Businesses are likewise worried about an array of uncertain federal policies, most especially those affecting health care and energy.

It is devilishly hard to estimate how much the economy is affected by this uncertainty. One approach is to compare the current state of the economy with what should have resulted from the stimulus spending. Fortunately, the President’s Council of Economic Advisors has provided this information through its 2009 stimulus estimate. There, the CEA projected the unemployment rate to now be about 7.3 percent. This was a reasonable approach, based on mathematical models that have performed well over the past few decades.

However, those estimates were well off the mark. The actual unemployment is now a full 2.2 percent higher. The most likely reason for this difference is that the CEA’s estimates did not account for the enormous loss of confidence the large deficits and array of other federal policies have foisted upon the economy. So it is not unreasonable to conclude that this weighty confusion of federal policy has cost us an astounding 3.3 million jobs.

And so it is with this recession, as with so many other things in life, that what we suppose will happen and how certain we are of it changes our behavior. This has significantly prolonged our economic difficulties, but it doesn’t take an economist to tell you that. Any political pollster will do.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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