Late last month the Commerce Department revised first quarter economic growth from its initially tepid .2 percent estimate to a putrid negative .7 percent. There was no shortage of excuses for these results. The West Coast port slowdown was cited, as was the usual whipping boy, severe winter weather. In April, CNBC analyzed 30 years of GDP data and showed that first quarter growth persistently underperforms expectations. Whatever the reason, or reasons, the fact remains that –seven years in–we are still mired in the slowest post-recession recovery in US history.
And, to paraphrase Humphrey Bogart, things are never so bad that they can’t get worse.
The almost unanimous consensus is that growth will turn positive again in the second quarter. Few, if any pundits predict another contraction. But, just for the hell of it, let’s ask ourselves a hypothetical question: what if the consensus is wrong? What if GDP growth comes in negative again? The answer, of course, would be the dreaded “R” word. Unfortunately, it’s not as unthinkable as it might seem. Even before this revision, last quarter’s results were a major surprise to the downside. Now, full year growth forecasts have been consistently dropping, with many economists lowering expectations from the 3+ percent range to near or below last year’s 2.4 percent. Most of this hoped-for expansion is expected in the second half of the year. This is becoming a depressing pattern. Better times are always just around the corner, a few quarters off … until they’re not.
Even if we don’t sink all the way into another recession, a disappointing second quarter would all but kill any chance of a rate hike in 2015. As long as rates remain at zero, the amazing bubble in the valuation of private companies will continue. So will the growing bubble in the valuation of public companies with few revenues and no profits. This is a crazy game of Russian roulette. Every time a Fed governor so much as hints at boosting rates, the markets tank, only to rebound on dovish comments from Chair Yellen. Yesterday, the Fed confirmed it wouldn’t raise rates until September at the earliest. Stock markets immediately rallied. It’s almost enough to make you wonder if our monetary authorities care more about keeping stock prices high than creating real economic expansion. Don’t worry, we’re told, we’ll begin “normalizing” monetary policy soon, just not now.
US economic growth hasn’t exceeded 3 percent since before the financial crisis. That’s unacceptable. It’s time to put all options on the table. A small but growing minority of economists believe the Fed needs to stop micromanaging the economy and keeping interest rates below the inflation rate. When money is free, bubbles inevitably occur–and when those bubbles burst, taxpayers are always forced to pay for the cleanup. Additionally, we could—and should—lower our high 35 percent corporate tax rate and pass legislation to end our idiotic “territorial” tax policy that trues up taxes on offshore corporate profits. That would allow American companies to bring home the money they make overseas so that they could invest it here. Coming at the problem from another direction, why should American corporations be forced to waste time and resources complying with government-mandated healthcare requirements? No other country in the industrialized world puts this burden on its private sector, so why don’t we free our businesses from it and provide a base level of government paid for (aka single-payer) healthcare to our citizens? The bottom line is, we need to do whatever it takes to get our economy moving again, even if it means rethinking our basic assumptions. The new normal is just not good enough.
[note: this post originally appeared on my Yahoo! Finance contributor page.]