Even with a billion dollars a day of stimulus: GDP Grows only 4.2% Which would be good numbers if we had seen this in 2002. Now, it says that even with the Fedal to the floor and borrow and squander running so fast that inflation is about to come back, the economy can manage "OK" growth.
Which means that if we move interest rates back to neutral, and move the deficit to a sustainable rate, GDP growth would be at 1.2%. Not encouraging, particularly with current producitivity growth. It means that the economy is boiling away about 1.8% of its growth potential to... something. The answer seems to be corporate profits.
What's worse is that the growth was entirely "bad GDP": lowered imports from devaluation, more government spending, and leveraged consumer spending.
Stirling Newberry writes for BopNews and is an advisor to the Jim Newberry campaign. The opinions expressed here are his own.
The recent market volatility, and the spike in oil futures point to an expectation by Wall Street investors that this recovery has reached the point of needing to be reigned in. The questions being asked are "where is monetary neutral?", since current policy is for easing, and "will inflation be sparked off by the long low interest rates?"
The theory that guides monetarism is that monetary policy, rather than fiscal policy is most effective in aiding the economy. However the recent experience is that this is not the case, three years of pedal to the floor monetary policy did nothing to counter-act a long wallowing jobs drought. While matters might have been worse with tighter policy, clearly it was not monetary policy which sparked a sudden spike in hiring and growth last fall. Looking at employment statistics from regions around the country, one can see the instant spike which is the sign of fiscal policy easing.
Hence, practically, fiscal, and not monetary, policy worked in this case. Which means the long fight over monetary versus fiscal policy, with its Republican Versus Democrat overtones, is settled as a matter of fact: monetary policy was able to manage general pressures, but below the threshold of linkage of money supply growth and inflation, it is fiscal policy that creates jobs.
As blogged last fall, the danger that Bush faced was that he had no levers on the economy, he could push jobs up and ignite energy inflation, or he could tighten, and send the economy into a spiral, or he could create low wage jobs and crunch the housing market. He chose to create jobs. With the violence in Iraq, and the rise of China and India as energy importers, we are soon going to be facing the results of that decision.