- The Washington Times - Saturday, April 28, 2007

Amid stellar first-quarter corporate earnings reports, which have pushed the Dow Jones industrial average to record levels and the more broad-based S&P; 500 stock index to near-record levels, the Commerce Department reported Friday that the economy expanded at an anemic annual rate of 1.3 percent during the first quarter. It was the fourth consecutive quarter of disappointing growth, following annualized growth rates of 2.6 percent in last year’s second quarter, 2 percent in the third and 2.5 percent in the fourth. The first quarter’s 1.3 percent growth rate, which was the slowest in four years, also came in well below the consensus forecast of 1.8 percent.

One immediate effect was to reduce the average annual growth rate of the Bush expansion (the last 21 quarters, beginning with the first quarter of 2002) to a generally unimpressive 2.9 percent. Moreover, if the annual growth rate for the current quarter comes in below 2 percent, then the average annual growth rate throughout the Bush presidency will have fallen below 2.5 percent. These are weak legacy numbers, particularly compared to the 3.6 percent average yearly growth rate during the eight-year Clinton presidency, which included average annual growth greater than 4 percent during the last five years (1996-2000). In addition, during the Clinton presidency, more than 22 million nonfarm private-sector jobs were created, reflecting a monthly average of nearly 230,000, according to the establishment payroll survey. That is four-and-a-half times the average monthly private-sector employment increase of 51,000 during the Bush presidency.

Given the incredibly expansionary fiscal and monetary policies that have been pursued since the end of 2001, the relatively weak 2.9 percent growth rate during the Bush expansion is quite puzzling. According to the National Bureau of Economic Research, which is the official arbiter of the U.S. business cycle, the 2001 recession ended and the current expansion began in November 2001. During this expansion, the national debt has increased by more than $3 trillion, reflecting an average monthly increase of $47 billion, or $560 billion per year. (The national debt actually declined by more than $100 billion during 2000.)

It’s hard to believe, but monetary policy arguably has been even more stimulative than fiscal policy during much of the current economic expansion. During the first three years, from November 2001 to November 2004, the Federal Reserve kept the federal funds interest rate at 2 percent or less. (The fed-funds rate, which is the interest rate banks charge each other for overnight loans, is the Fed’s target rate over which it exerts the most control.) For 20 months (from November 2002 through July 2004) of that three-year period, the fed-funds rate was 1.25 percent or less, including a one-year period when it stood at a rock-bottom 1 percent.

Even when the Fed began raising its target interest rate in June 2004, it did so at a leisurely pace that was unprecedented. For example, by the time the Fed raised the fed-funds rate to 4 percent in November 2005, the consumer price inflation rate for the preceding 12 months was 4.7 percent, resulting in a real (inflation-adjusted) fed-funds rate of minus 0.7 percent. It is amazing: Four years into the expansion, and the real fed-funds rate was still negative. By way of comparison, the fed-funds rate bottomed out at 3 percent during the previous economic recovery, which followed a recession that was as brief and as shallow as the 2001 downturn.

On top of the breathtakingly stimulative fiscal and monetary policies, the current expansion has also been the beneficiary of a significantly declining dollar, which has had the effect of making U.S. exports much cheaper than they otherwise would be. The Fed compiles a weighted, inflation-adjusted basket of “major currencies” that circulate widely outside the country of issue. Among other tradable currencies, the basket includes the euro, the Canadian dollar, the British pound and the Japanese yen (but not the Chinese yuan). Since peaking three months after the current expansion began, the dollar has incurred a real depreciation of 23 percent (through March) against the Fed’s basket of major currencies. Absent this depreciation, it is fair to assume that America’s trade deficit would be in significantly worse shape than its current dismal condition. By making U.S. exports relatively cheaper, a declining dollar acts as an expansionary catalyst.

Despite the unprecedented expansionary policies, the economy has grown by only 2.9 percent per year since the recovery began. Meanwhile, the national debt has increased by more than $3 trillion during the expansion. And as the subpar expansion continues, the Bush administration’s 2008 budget projects raising the national debt by an average of $550 billion per year during the 2007-10 fiscal period.

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