The first quarter of 2014 was the worst for our economy in five years and the worst outside of a recession since the end of World War II, according to revised numbers released by the Commerce Department Wednesday.
Preliminary numbers issued weeks ago suggested a one percent contraction. A shrinking of nearly three percent may suggest a worse economy than we really have, but economists say this is still very bad news.
“Experts say that this quarter was particularly bad but what we see is economic growth chugging along at around two percent (over the long term). That’s not enough to create jobs Americans need. The labor force participation rate is at 1978 levels, which is before millions of women walked into the workforce. That is just too low. We need to do something to ramp up our economic growth so it doesn’t just chug along at two percent,” said Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute who served as chief economist at the Department of Labor under President George W. Bush.
Economists of various stripes are offering explanations for the lackluster start to the year, ranging from reduced consumer spending to a colder than usual winter. Furchtgott-Roth says not all evaluations are created equal.
“I think we need to look at consumer demand. Exports were low. Consumer demand was low. It was clearly not all weather-related. People like to say it’s weather-related because that takes the pressure off what they are actually doing. We had bad weather in the fourth quarter of 2013 but that did not have the same effect. Also, when there’s bad weather, you spend more money clearing out some of the snow and there’s also more of a bounce back. We didn’t see that much of a bounce back in March. We’ll have to see what the second quarter does,” said Furchtgott-Roth.
Another nagging drag on the economy, she says, is the worsening level of certainty business owners feel when it comes to adding jobs or planning to expand their business. Furchtgott-Roth says conditions for business owners remind her of a very dreary time in economic history.
“We don’t have a lot of certainty now. We have even less than we had in the first quarter. The Middle East is blowing up. Rebels took over an Iraqi oil refinery yesterday. We know that inflation is starting to kick up. We’re looking very much like the end of the 1970s, where we had inflation and oil troubles,” she said.
Furchtgott-Roth is quick to add the oil concerns are far less severe now than in the 1970s because of much greater domestic production today.
What would improve certainty and spur economic growth? Furchgott-Roth says the first place to look is tax policy.
“There are fundamental reasons why people are not investing in the United States. Our corporate tax rate is the highest in the world. Both President Obama and Republican leaders and Democrat leaders in Congress agree it should be lowered. This is something the administration and Congress should move forward with right away,” she said, noting America’s corporate tax rate is the highest in the industrialized world and that more and more businesses are engaging in “inversions,” the practice of setting up headquarters in other countries to take advantage of more favorable tax climates and taking tax revenues out of the U.S.
She says doubling down on energy production could produce a major financial windfall for our country.
“We need to have further development of our energy sector, which has been the growth driver of our economy. All the growth in energy has been on private land. There’s been a decline in explorations on federal lands. We have a lot of scope to move forward with energy development on federal lands by increasing permitting. That would also increase tax revenues to the government,” said Furchtgott-Roth.
President Obama is receiving poor marks on the economy in recent public opinion polls, however the administration frequently argues that it’s pro-growth agenda is being stymied by Republicans in Congress. It’s priorities are often listed as being in the transportation and green energy sectors and by generating more spending in the economy through an increase in the minimum wage and equal pay for women. Furchtgott-Roth dismissed each of those as economic losers, starting with transportation and infrastructure spending.
“We had almost a trillion in stimulus, most of which was focused on infrastructure in [2009]. Remember the shovel-ready jobs that never really appeared. It was only last month that our employment reached levels that it was in 2007. It’s clear that infrastructure is not a panacea. There are many unemployed people who don;t want to be building roads. They want other kinds of jobs,” she said, while also taking aim at the arguments for a minimum wage hike and more spending to develop renewable energies.
“Raising the minimum wage doesn’t create employment. It just means that people whose skills are less than the new minimum wage , which would be around eleven dollars an hour, don’t get to work at all. They have to drop out of the labor force. They are unemployed. Neither of those would really help to raise GDP growth,” said Furchtgott-Roth.
“Alternative energy, wind and solar, are twice as expensive as producing electricity from natural gas or from coal. Making electricity more expensive does not increase GDP growth. Factually, the measures that the Democrats are recommending will result in less growth rather than more growth,” she said.
Furchtgott-Roth says urgent action is needed on tax and energy policy, but she doesn’t expect much progress this year.
“I wish I could say that this bad economic news is going to make the Republicans and Democrats get together and develop sound economic policies, but I think that’s too optimistic in the climate of Washington right now. I don’t know what’s going to happen, but it probably won’t be sensible coordination on economic policy,” she said.
