On Our Own
Gross, Daniel, Newsweek
Byline: Daniel Gross
The government seems to have run out of ideas for rebuilding the economy, but businesses and consumers are figuring it out for themselves.
In Washington, on Wall Street, and in anxious boardrooms and kitchens across the country, concerns are rising about the possibility that the U.S. economy could slip back into recession--a so-called double dip. The economy lost 125,000 jobs in June; the unemployment rate still hovers near 10 percent. Four years after it peaked, the housing market has yet fully to stabilize. Perhaps most distressing, the vital forces of monetary and fiscal policy that the government marshaled to stave off the Great Recession last year seem to have flagged.
In 2008 and 2009 the Federal Reserve (monetary policy) and the political system (fiscal policy) rushed to the aid of the stricken patient. The Fed guaranteed and bought financial assets, slashed interest rates, and flooded the financial system with money. Congress and the White House pushed through an aggressive $787 billion stimulus package. These heroic, expensive interventions jolted the economy back to life. In the first quarter of 2009 the economy shrank at a 6.4 percent annual rate; in the first quarter of 2010 it grew at a 2.7apercent clip.
But the sugar high of low interest rates and government stimulus spending is wearing off. The Federal Reserve, so imaginative when it came to saving the financial system, seems to have run out of ideas for dealing with higher unemployment. More than half the stimulus, about $417 billion, has already been spent. Congress adjourned in July without passing an extension of unemployment benefits. And with midterm elections four months away, a new jobs bill seems unlikely. Even as economic momentum flags, headwinds are gathering strength. In January 2011 most of the Bush-era tax cuts are slated to expire; soon after, the Fed is expected to start raising the rates it controls. The combination of higher interest rates and higher taxes is likely to tamp down consumer spending. Thanks to Washington's inaction, writes former Clinton labor secretary Robert Reich on his blog, "we are now slouching toward a tepid recovery that could just as well fall into a double-dip recession, while a large portion of our population suffers immensely."
Sounds pretty grim. But if we had thrown in the towel every time monetary and fiscal policy failed to meet expectations, Americans would be migrating to Mexico in search of jobs. While noting that the U.S. economy has lost some momentum, Macroeconomic Advisers predicts GDP will grow 3.2apercent in 2010 and 4 percent in 2011. "At the end of the day, the recovery will remain intact even if there is no additional policy support," says Mark Zandi, chief economist at Moody's Economy.com.
But there is still much work to be done. And while policy helped stop the panic and shocked the economy back to life, new government initiatives are not what's going to drive the next phase of recovery. If American businesses and consumers want to avoid a slowdown, they're going to have to do it themselves. The good news: the expansion can continue if the U.S. economy taps into some of the same non-governmental forces that helped propel the recovery of 2009--a capacity for innovation, resilience, and, most of all, an ability to ride the continuing wave of global growth.
This do-it-yourself stimulus has already started. Corporate America's balance sheet has never looked better, and consumers are paying down debt and bolstering savings. The challenge is a reluctance to spend. To try to jump-start consumption, companies are enacting mini stimulus programs of their own. In years past, teen-oriented retailer American Eagle has given away free T shirts and movie tickets to potential shoppers as part of a back-to-school promotion. This year it's offering a free smart phone to shoppers who try on a pair of jeans (and sign up for a plan). …