Monday, June 13, 2011

Will The 5% Nation of Casiotone Accept the 2% Solution?

Larry Kudlow lauds Tim Pawlenty's call for fiver percent economic growth in a piece at National Review Online:

Former Minnesota governor Tim Pawlenty turned out a blockbuster economic-growth plan this past week, including deep cuts in taxes, spending, and regulations. It’s really the first Reaganesque supply-side growth plan from any of the GOP presidential contenders. And he caps it all off with a defense of optimism as he charges ahead with a national economic growth goal of 5 percent.

That’s right: 5 percent.

Pawlenty calls this target aspirational. Okay, fine. But deeper down, he’s basically saying no to the declinists and pessimists who seem to populate the economic landscape these days. Big government doesn’t work. Let’s try something different.

Kudlow goes on to praise Pawlenty for laying down such an aggressive marker for growth. And T-Paw does deserve credit for talking specifically about what he would do as president to promote economic growth and what that growth would look like instead of tossing off vague platitudes about "creating jobs" and "getting the economy back on track."

But Pawlenty's best intentions for growth may be no match for the economic malaise that the country could be mired in for some time. Kelly Evans described this unpleasant reality in a piece in Saturday's WSJ called U.S. Economy Braces for Soft Target:

Yet, while there will be stronger quarters, this 2% reality is probably here to stay for a while. The fundamental problem for the U.S. economy today is a lack of demand, precisely because so much of it was pulled forward during the credit and housing bubble. Need proof? Check out the sinking yield on the 10-year Treasury note, which is struggling to stay above 3%. If that seems low, consider that yields on Japan's 10-year note hit a low of 0.4% in 2003—more than a decade after its own asset bubble popped.

This discouraging reality also illustrates why the Federal Reserve's aggressive monetary policy is mistimed. It would have been far more beneficial for policy makers to keep household debts from soaring in the first place than to try now to support asset prices like housing. Indeed, the Fed's latest quantitative easing efforts failed to stem the drop in home prices, instead giving stocks and commodity prices a lift—with the benefit skewed to the richest Americans.

The central bank cannot create a new generation of willing home-buyers. In fact, the current generation is more likely to eschew home-buying altogether. So there is no magic lever to bail out households stuck with massive mortgage debts. The process of repairing household balance sheets will simply take time. In the meantime, the U.S. should consider itself lucky if 2% growth is as bad as it gets.

The question is whether Americans can and will accept the reality of stunted ecomonic growth for some time. And whether our politicians will be gutsy enough to talk about that reality during the 2012 campaign.