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EDITORIAL: A sand-castle recovery

Bad policies keep the economy stuck in the mire

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The Obama administration has been claiming the economy is back on track ever since it declared the "Recovery Summer" of 2010. That 348,000 more people found themselves jobless in the last 30 days is being hailed as good news, but only because that number could have been worse.

If America is on an upswing, the situation remains fragile and easily reversible. Recessions generally end with strong recoveries. This one has not, with the economy growing a sorry 1.7 percent in 2011, and there are signs that 2012 might be worse. The Congressional Budget Office's prediction of a 2 percent increase in the gross domestic product this year is optimistic, as the latest data are failing to meet expectations.

U.S. industrial-output growth missed forecasts in January, growing a bare 0.7 percent, as downturns in utilities and mining counteracted an uptick in the manufacturing sector. The demand for gasoline remains sluggish as prices continue to rise. Even more ominous is what's happening in the housing sector. Starts were up, but mortgage-application volume was down this month. The bulk of applications are for refinancing, suggesting that new buyers aren't coming into the already oversupplied market. In fact, prices dropped in 19 of the 20 cities tracked by the Standard & Poor's/Case-Shiller home-price index.

Nor did the bad news for the housing market end there. Late payments on mortgages rose in the last quarter of 2011, the second straight increase after declining for two years. Eighteen states showed increases in delinquency rates, with New Jersey showing the biggest jump, from 7.4 percent to 8.3 percent. The economy cannot get back on a stable growth path until the housing market shakes itself out, which will be a long and painful process.

Adding to the pain, inflation looms on the horizon. So far, the Federal Reserve has pumped enormous amounts of money into the system through two rounds of quantitative easing. The Fed also has announced that it will hold short-term interest rates at their present near-zero levels to the end of 2014, though the just-released minutes of the January meeting show that a split between the inflation hawks and doves remains significant at the Fed.

For now, a majority of the Fed's policymaking committee agrees that slow growth alone is an inadequate reason for expansionary monetary policy. But Federal Reserve Chairman Ben S. Bernanke hasn't closed the door to another round of easing. That could be a problem, given that the inflation rate in 2011 was double that of 2010.

What we have are problems with the real economy. America has a large and climbing fiscal deficit, an environment rife with regulatory uncertainty and an ever-increasing red-tape burden. President Obama's budget proposes tax increases to go along with the higher rates that will kick in with the expiration of George W. Bush's tax cuts. All of these burdens drag down private-sector investment and job creation. An activist monetary policy adds inflation to the mix. The Fed, Congress and the president need to get their act in order for there to be any hope of true recovery.

The Washington Times

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