Opinion pieces and speeches by EPI staff and associates.
[ THIS PIECE ORIGINALLY APPEARED IN ATLANTA JOURNAL-CONSTITUTION ON NOVEMBER 4, 2003 ]
Glee over economic gains premature
By Lee Price
On the surface, the news that the U.S. economy expanded at a remarkable 7.2 percent rate in the third quarter – after several quarters of lackluster growth – seems very promising. But this temporary boost in gross domestic product is not indicative of a trend toward a robust economy that will reverse our steep job declines and give American workers more money in their pockets. This increase in the output of goods and services, however noteworthy, will be a flash in the pan unless jobs begin to grow strongly.
Consumption, investment, government spending and rising net exports all contributed to last quarter’s rapid rise in growth. But one must go beyond the surface and investigate what is propelling this hike.
Two strong causes of this growth spurt will not be repeated. First, income tax payments dropped by $100 billion at an annual rate. This one-time tax cut allowed after-tax income to grow 7.2 percent even while before-tax income rose only 1.5 percent. Real wage and salary income actually fell by 0.1 percent in the quarter, signifying that after all is said and done, workers are still falling behind despite faster growth.
Second, an exceptional surge in mortgage activity also spurred growth. The temporary plunge in mortgage rates in May and June led consumers to buy new homes and take cash out from refinancing in the third quarter. The subsequent slowdown in mortgage activity will leave consumers with less to spend in the current quarter and future quarters.
And most significantly, despite these gains in GDP, employment fell by 146,000 from the second to the third quarters. Continued job loss will ultimately drag down economic growth.
We are currently getting an enormous boost from increased military spending, tax cuts and a temporary spike in mortgage activity for new homes and refinancing. But the thing to look at is whether the financial underpinnings for long-term growth are truly in place. They are not.
Despite President Bush’s rush to claim the 7.2 percent spike as a victory and a vindication of his economic policies, the temporary economic stimuli that produced this growth will soon fade. And unless employers start hiring and increasing their real wage and salary payments, the current spurt in consumption will subside.
The question we now need to answer is how can we create sustained growth that reaches beyond quick-fix solutions with a very temporary shelf life. Then American workers will see an improved economy and can truly sing a different tune – for the long term.
Lee Price is research director of the Economic Policy Institute, a nonpartisan think tank in Washington.
[ POSTED TO VIEWPOINTS ON NOVEMBER 4, 2003 ]