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Greenspan’s optimism misplaced

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Greenspan’s optimism misplaced

By  Jared Bernstein

Reports on the state of the economy have a touch of Charles Dickens these days, with two seemingly contradictory worlds coexisting in the same time and space. On the one hand we have the economy that Alan Greenspan is “upbeat about,” according to a Washington Post headline. On the other, there’s the one that’s wallowing in the worst jobless recovery of the post-World War II era.

So which world is real?

To some extent both are. But, ironically, ignoring the economy’s dark side could doom it to get worse.

The rosy view of the economy is based on the long view. As Greenspan said in testimony last month, “The long-run growth potential of the economy remains solid.”

But the somber view reflects the real economy where Americans live, work and pay their bills. Since the recession began in the spring of 2001, the labor market has shed close to 3 million private-sector jobs, and a fifth of the unemployed have been jobless for more than half a year because there are three unemployed people for every vacancy.

Which view should policy-makers adopt? This question is far from academic. If our faith in the strength of underlying economic fundamentals prevents us from taking appropriate action soon, the living standards of millions of working families will suffer and the fledgling recovery itself might never take flight.

Greenspan’s perspective leads him to recommend doing nothing now to reverse the jobless recovery, both because he downplays the labor market upheaval and because he believes these problems will solve themselves later this year. His confidence appears to draw from the reduced war uncertainties, the underlying strength of productivity growth, the lower price of oil in recent weeks, and the amount of fiscal stimulus already at work.

But his confidence is misplaced. The war may have dampened consumer spending somewhat, but what’s really holding back all-important consumption growth is the weak labor market, and many forecasts are now calling for only a small, war-related boost in second quarter GDP.

Similarly, falling energy prices will help stretch paychecks a bit further in coming weeks, but they won’t reverse the pay stagnation that has been brought on by persistently high unemployment. Strong productivity growth remains a plus, but more efficient production won’t add jobs.

This leaves us with the question of stimulus. Greenspan thinks there is enough stimulus in the system already, but that probably is more a reflection of his distaste for budget deficits than of what’s really needed. Recent research by Goldman-Sachs finds that private sector weakness is draining as much as $200 billion out of the economy, and states, which must, by law, balance their budgets, are taking out an additional $50 billion. To counteract these growth-killing trends, Washington needs to quickly get this much aid to the states. The Bush plan, for all its big spending, won’t help much. It provides little real stimulus this year and next, then phases in large, permanent tax cuts by the end of the decade.

If we really want to take aim at the weak recovery, there are two things we should do, both of which have been proposed by congressional Democrats.

First, we have to help the states. Because they are already making cuts in education, medical care, and child care for the working poor, resources directed towards them would get right into the economy, as they reinstate these services. Next, Congress should extend unemployment benefits another 13 weeks, a great way to help the long-term jobless and stimulate the economy.

Greenspan is surely right that in the long run, we’ll be fine. But the question is how far off that long run is. Unless we get serious here and now about addressing the jobless recovery, millions of Americans will remain mired in what, for them, is the worst of times.

Jared Bernstein is an economist at the Economic Policy Institute.


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