Economic growth, in theory, can solve the two most niggling problems facing the country – unemployment and a soft housing market. Growth can lead to more demand, forcing businesses to hire to keep up the supply. Paradoxically, this would lower corporate profits from 2010, where they hoarded cash. Spending that cash would increase overall growth. Similarly, growth would be the biggest cure for the housing sector. It would create more single-domicile families, prevent more foreclosures and defaults, tighten supply and increase demand for housing. While supply is very large right now, after it gets absorbed you would even see new construction and housing starts, which feeds back on job creation. Growth, then, in this reading, is the key indicator. And everyone is predicting economic growth in 2011.
That would hold as long as we were talking about spectacular growth, and as long as the economy was not coming out of a Depression-like state. But as Paul Krugman explains, the kind of growth needed – and the current state of the economy – are not in that place right now.
First of all, we have to grow around 2.5 percent a year just to keep up with rising productivity and population, and hence keep unemployment from rising. That’s why the past year and a half was technically a recovery but felt like a recession: G.D.P. was growing, but not fast enough to bring unemployment down.
Growth at a rate above 2.5 percent will bring unemployment down over time. But the gains aren’t one for one: for a variety of reasons, it has historically taken about two extra points of growth over the course of a year to shave one point off the unemployment rate.
Now do the math. Suppose that the U.S. economy were to grow at 4 percent a year, starting now and continuing for the next several years. Most people would regard this as excellent performance, even as an economic boom; it’s certainly higher than almost all the forecasts I’ve seen.
Yet the math says that even with that kind of growth the unemployment rate would be close to 9 percent at the end of this year, and still above 8 percent at the end of 2012. We wouldn’t get to anything resembling full employment until late in Sarah Palin’s first presidential term.
It’s really just a simple math equation. But the stories behind that math will break your heart. You’re talking about millions of families suffering. They’re not likely to get much of a lifeline from any government programs, particularly if they’re long-term unemployed; as Krugman says, the best-case scenario for fiscal policy is that it doesn’t actively harm anybody. And a return to the growth which can speed hiring will only make the market for jobs for the unemployed more competitive, as people return to their job searches.
Not to mention that there’s the matter of criminal fraud in the housing markets, which will become ever more apparent as the year goes on.
2011 could represent a return to long-term growth; it won’t represent anything like a return to normalcy.