How Robust the Recovery?

Comment: Interesting article on the jobs report, inflation, unemployment benefits, et cetera

The 2010 Recovery

Excerpts:

Jobs

The jobs market does seem to have turned a corner, with the Labor Department's survey of businesses reporting 162,000 new jobs in the month, plus modest upward revisions in January and February. One bright spot is manufacturing employment, up 17,000 in March and now up for three straight months, as well as a modest uptick in average hours worked to 34 in a week, from 33.9.

The companion household survey showed a heftier increase of 264,000 net jobs, rising to 1.1 million so far this year, and as we learned in the last recovery this survey tends to lead increases in what business reports in future months. The upshot is that at long last—and 13 months after the $862 billion stimulus that the White House said would keep unemployment below 8%—we should see more robust job creation in the months ahead.

Jobless Benefits

Congress keeps extending jobless benefits, and last week President Obama proposed a new subsidy for the jobless in the form of mortgage payment reductions if you're out of work. Democrats think this is good politics because they can accuse Republicans of being uncaring if they vote no.

But the irony is that these extensions only increase the incentive to delay going back to work, especially if most available jobs are temporary or pay less than their old ones.

Monetary Policy

The larger policy context is that the U.S. recovery has been built on an enormous reflation bet, both fiscal and monetary. The stimulus and its many sister subsidies (housing tax credits, cash for clunkers, etc.) have flooded the economy with government-directed cash and credit. We think marginal-rate tax cuts would have done much more for growth, as in 1983 and 2003.

The Federal Reserve has also kept and maintained an historically easy monetary policy. This was necessary for a time to offset the decline in monetary velocity in the wake of the credit panic, but the near-zero interest rate has also made it easier for banks to make money on interest-rate plays rather than actual lending. It is also contributing to higher commodity prices and distortions in the dollar bloc overseas.

Inflation

As we look beyond this year, the bill for this Great Reflation will eventually come due. Coming out of the last steep recession, in 1983, both interest rates and tax rates were coming down. Today, they are both headed up.

Taxes

A huge tax increase hits on January 1, as the Bush rates expire.