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We’re In Purgatory.

Nov 25, 2009 | By: Mr_Blue | Comments | Permalink | Tags: jobs, gdp, economic growth, job growth

We’re in economic purgatory and it doesn’t feel good. Yesterday, the Commerce Department revised DOWNWARD the third quarter Gross Domestic Product (GDP) from 3.5% to 2.7% increase. Sure the economy is growing but there are NO jobs to show for it.

Besides the economy, as measured by GDP, will have to grow much more than that to generate jobs. Let’s review this most recent report on GDP. First, recall that GDP is roughly calculated as:

GDP = Consumer Spending + Gross Business Investment + Government Spending + (Exports - Imports)

And so why was GDP revised downward:

The second estimate of the third-quarter increase in real GDP is 0.7 percentage point lower, or $23.7 billion, than the advance estimate issued last month, primarily reflecting an upward revision to
imports and downward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by an upward revision to exports.

Those cheap imports can be a drag on our economy - just look at the formula above.

We have a huge problem with our economy. Our economy relies too heavily on consumer spending - over 70% of GDP consists of consumer spending. This is crazy. There was a time when we used to make things in this country and we had a much stronger economy to show for it. Not any more.

So what do we do? First, and most obvious is JOBS. But the problem is that the private sector is not in any shape to create jobs - a business needs a reason (demand) to hire people but there is no reason to hire. This leaves - yes - the government. We need to explore options such as a direct jobs program similar to the Works Progress Administration or Civilian Conservation Corp. And once there are signs of life in the private sector then we should look at some sort of jobs tax credit to foster further job creation. The government should be the employer of last resort.

Second, in addition to a direct jobs program, we need a National Infrastructure Bank that will help maximize and efficiently utilize investments in our nation’s infrastructure. Third, we need a national industrial policy or strategy in this country. This national policy/strategy should determine what are we going to manufacture in the U.S. and what government resources and policies will be utilized to make sure that we are successful at manufacturing those items. There is a lot more that needs to be done.

Short term stimulus is just that short term. We have significant structural defects in our economy that must be addressed now or we can expect to revisit another economic crisis in another five to ten years. If you don’t believe me just ponder this graph:

This is the annual percent change in jobs or annual job growth since 1980. Notice how it’s trending downward. We need to stop this trend.

Good luck.