Practical Economics


Washington Fiddles as Economy Teeters

John Maggs

The economy is sending warnings of a slowdown, but Congress, Obama aren’t listening.



Today, reality washed up on the eastern shore of the Potomac, but it was an unfamiliar sight to most of the locals.

SEE ALSO: Kiplinger's Economic Outlooks

As politicians continued their tragicomic struggle over raising the debt limit, the Commerce Department reported that economic growth was alarmingly weak in the first half of 2011, raising the chances that the economy has or could soon slip back into a recession.

Kiplinger still believes that growth will continue, but the warning signs are unmistakable.

History shows that in almost every case since World War II, when the annual growth rate slips below 2% for a 12-month period, then the United States has a recession. Remember: A recession isn’t always a contraction in growth — it is a period of diminishing economic activity.

It turns out that growth diminished abruptly in the first three months of 2011, from a 2.3% annual rate at the end of 2010 to only a 0.4% rate. And it didn’t get much better in the second quarter, growing at only 1.3%, according to a preliminary estimate.

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As a result, economic growth is in the red zone: Over the last 12 months, it has grown only 1.6%. Only once, in the mid-1950s, did growth get this slow and not signal an immediate recession (in that case, a true recovery never arrived and a deep recession began a year later).

The report today led many economists to revise downward, again, their projections for growth in 2011, and prompted a handful to announce that another recession has already begun. Kiplinger is projecting that the United States will narrowly stay out of the ditch, posting 2% growth in Gross Domestic Product in 2011, with a strengthening recovery next year.

But this assumes that no other shock comes along. Recessions are usually caused by a series of events — natural disasters, military conflicts, oil price spikes — that combine with a weakened economy. America has endured some of these recently and kept growing, but today’s grim numbers mean there is little room for more bad news.

Often these economic shocks are out of the control of our government, but sometimes they are not. Occasionally, the Federal Reserve has to make a tough decision about whether to raise interest rates to control inflation. It is a dilemma, because higher rates sometimes cause a recession. Other times, however, the decision isn’t so tough, or at least it shouldn’t be.

This is one of those times. With economic clouds gathering around the world — the Greek debt crisis, instability in the Middle East — that are beyond our control, our leaders have voluntarily created another crisis. And while the effects of other economic shocks are debatable, there is little debate about what will happen if the government fails to act responsibly on the debt limit — a serious financial crisis that would probably engulf the world.

Considering this, you might imagine that today’s bad economic news seized the attention of those supposedly trying to reach a deal on raising the debt limit.

You would be wrong. Two hours after the numbers were announced, President Obama went before cameras to scold congressional negotiators, and didn’t mention the news on economic growth. He called on Congress to embrace a bipartisan compromise, while clinging to the Democratic political stance that deficit reduction is impossible without raising taxes on the wealthy.

Neither did House Speaker John Boehner address the topic. He was too busy lining up votes for a deficit-cutting plan, doomed to fail in the Senate, that was mostly intended as a statement on GOP unity and his hold on the Speaker’s gavel.

Deep in their rhetorical bunkers, the president and congressional leaders don’t hear the ordnance falling around them. The debt limit debate began as another dreary example of the way our leaders treat important responsibilities as an opportunity to seek political advantage. But now it has become something darker. The cold, hard facts about the faltering recovery should have transformed the debt limit farce, and led to a quick compromise. The fact that this news hardly registered in Washington said more about the dysfunction of our government than anything else could.



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