EDITORIAL: The ongoing slump

Uncle Sam’s current path guarantees economic stagnation

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The Federal Reserve concluded Wednesday’s Federal Open Market Committee meeting without making a decision to change anything. The Fed intends to continue buying long-term securities, mostly mortgages, in an effort to keep interest rates artificially low. It shows the central bank isn’t particularly optimistic about prospects for economic growth.

Despite a few hopeful signs in the housing market and consumer spending, the rapidly approaching fiscal cliff and recession in Europe are dragging things down. We’re seeing the effects in falling corporate profits, a massive slowdown in investment and broad measures of joblessness of 14.7 percent.

The Fed’s latest round of money-pumping, known as quantitative easing, is meant to drive down the cost of mortgages. It also has the secondary effect of making lenders more cautious, pushing more people into the arms of the already undercapitalized Federal Housing Authority for loans. So sales and housing starts were up in the past month, but the level of new home sales remains far below the 1.4 million number at the 2005 peak. The housing sector needs a lot more growth before it can be described as healthy. The darker side of the market remains, with 1.3 million homes in some state of foreclosure. Metropolitan markets have improved, but in the rest of the country, the real estate market remains in the doldrums. True recovery is a ways off.

Consumer spending increased by about 0.5 percent each in July and August. That would be good news, except the increase far outpaces the 0.1 percent increase in incomes. That means Americans are running down their savings to consume, which is neither desirable nor sustainable.

Other indicators are flat-out discouraging. Corporations broadly are reporting reduced profits. Much of the blame for this goes to the decreasing demand for American exports in Europe. Durable goods orders are stagnant, a figure that reflects pessimism among those making investment decisions. Business purchases of capital equipment, excluding defense-related items, were down 5.6 percent in July, up a minuscule 0.2 percent in August and flat in September. No wonder manufacturing lost 16,000 jobs last month on top of the 22,000 pink slips delivered in August. This is not what recovery looks like.

All entrepreneurs see on the horizon is Washington continuing on the path of binge spending and massive debt. President Obama promises more taxes — the first round of tax hikes is already set to hit in January, unless Congress acts. Instead of risking their capital on ventures that expand their business, creating growth and prosperity, entrepreneurs are holding on to the cash that Uncle Sam is poised to take away from them.

Under no theory is raising taxes a good idea when annual economic growth rate is under 2 percent. It just takes money out of the hands of consumers and businesses. The Fed’s idea of running the monetary printing presses on overtime is just going to risk massive inflation. America needs to chart a new course that cuts government spending, reduces taxes and regulatory burdens so the private sector will have room to grow.

The Washington Times

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