Global Economics

The U.S. Economy's 'You First' Problem


In 1901, William Randolph Hearst's New York Journal launched a cartoon featuring two overly polite friends named Alphonse and Gaston. Each insisted with conspicuous courtesy that the other go first. Amid elaborate bowing, scraping, and après-vous-ing, Alphonse and Gaston never managed to make it through an open doorway.

Now, 110 years later, economists have a name for the Alphonse and Gaston routine that's hobbling the U.S. economy: "coordination failure." Companies won't hire because customers won't spend. Customers won't spend because companies won't hire. This stare-down has been going on since approximately December 2007, when the worst slump since the Great Depression took hold. Many Americans would like someone to make a move so they can get back to prosperity. Yet they've lost confidence in the actions that were designed to build confidence and restore growth—namely, near-zero overnight interest rates, the bailout of the financial system, a weakening dollar, and stimulus measures that add to the federal budget deficit and the national debt.

The latest downer: Housing prices in 20 big U.S. metropolitan areas fell in March to their lowest level since 2003, according to the S&P/Case-Shiller Index released on May 31. "I wouldn't be surprised to see prices continue to fall this year and maybe into next year," says Paul Dales, a senior U.S. economist at Capital Economics in Toronto. The Conference Board announced on May 31 that its measure of consumer confidence fell to 60.8 in May from 66 in April. (It was more than 100 before the recession.) Manufacturing growth is slowing, too, according to the latest data released on June 1. The factory index of the Institute for Supply Management fell in May by the most points since 1984.

In Boulder, Colo., Michael R. Englund, chief economist at Action Economics, hears the grumbling on the sidelines at his children's sports matches. "The whole country's talking about monetary policy, and it's pretty hostile," says Englund. "They're asking me, 'Are we still going to have a dollar in five years?'" From Scottsdale, Ariz., retired tech executive and Tea Party activist Arch McGill says people fear government: "The elite need to visit the West, Midwest, and South to get an understanding of the mood of the people—they are pissed, buying guns and food for the coming battle."

The tension between the elite and Main Street is not going away: Economic decision-makers in Washington, headed by Federal Reserve Chairman Ben Bernanke, continue to defend the bailouts and easy money as necessities for economic recovery. In a little-noticed remark at his April press conference, the first by a Fed chairman, Bernanke said that in his view the main risk is not doing too much, it's doing too little. In past crises, he said, it "might be that policy responses were not adequate ... to get as quick a recovery as might otherwise have been possible."

Just how or why expansions begin still isn't well understood after more than a century of research. The French economist Léon Walras (1834-1910), the founder of general equilibrium theory, speculated that an economy climbs back to full employment through a process called tâtonnement—French for the groping, trial-and-error strategy that mountain climbers use to find hand- and footholds on a rock face. As any rock climber knows, though, tâtonnement can lead to dead ends. Says Franklin M. Fisher, a microeconomist and professor emeritus at Massachusetts Institute of Technology who has studied Walras and his successors: "The notion that the economy will dig itself out isn't always true. Even if you know that the economy will sooner or later clean itself up, if that 'later' is awfully far away, you have to wonder."

The risk is that instead of steadily making its way back to full employment, the U.S. economy gets stuck in the current low-growth rut. Employers are sitting on their hands. True, they've stopped ditching workers: Layoffs and firings in March were tied for their lowest level of the past decade, at 1.2 percent of employment, according to the Labor Dept.'s Job Openings and Labor Turnover Survey. But companies aren't hiring, either. At 3.1 percent of employment in March, the hiring rate is barely up from the recession low of 2.8 percent. What's more, it's lower than the 3.8 percent level at the same stage of the last recovery, in late 2003. "If you already have a job, the labor market probably doesn't seem so bad, but if you're looking for a job, there's been almost no job market improvement over the last few years," says Michael E. Feroli, chief U.S. economist at JPMorgan Securities (JPM).

When people are out of work for extended periods, their skills atrophy, their contacts in the working world dry up, and their chances of reemployment diminish. Forty-six percent of the unemployed have been out of work for half a year or more, more than triple the usual proportion. Peter A. Diamond, the MIT economist who has been awaiting Senate confirmation of his appointment to the Federal Reserve Board for 13 months, wrote in February that with so much slack in the labor market, further fiscal stimulus can add jobs without raising inflation.

Not everyone is gloomy. The Standard & Poor's 500-stock index is hovering near its 2010 high after having doubled since its March 2009 low. Yet the recent drop in Treasury yields, to below 3 percent on the 10-year note from a recent peak of 3.7 percent in February, reflects increasing skepticism about the outlook for growth. The National Federation of Independent Business's index of small business owners' optimism fell in March and April, partially reversing a gradual uptrend that began in early 2009. "The 'get-up-and-go' usually present in the small business sector after a recession 'got-up-and-went,'" the organization announced on May 10. Corporate Executive Board, an Arlington (Va.)-based research and advisory company, said on May 31 that hiring expectations at large companies dipped in the first quarter for the first time since its survey began in October 2009.

The public is no more buoyant. "I think we are stuck in a vicious circle," says Fred Crawford, CEO of AlixPartners, a Southfield (Mich.)-based business consulting firm. "There's a pervasive feeling of uncertainty." The Chicago Booth/Kellogg School Financial Trust Index, based on a survey of the American public, fell in March to 20, plumbing the lows of 19 and 20 reached in the depths of the financial meltdown of 2008-09.

There are really two stalemates here. In the economy, both consumers and businesses are waiting for a stronger signal of better times ahead. In politics, the system is deadlocked over whether the economy needs more help from the government or less. A Nobel prize goes to whoever can end this routine and get America growing again.

The bottom line: The key players in the U.S. economy—big companies, small businesses, and consumers—are all searching for a way to move forward.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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