"Modest to Moderate" Growth Not Good Enough

After four-plus years of a deep recession and poor recovery, some can get excited when the economy merely muddles along at a below-average rate of growth.

That seems to be the case with some in their reaction to the release of the Federal Reserve’s Beige Book on April 11. The information gathered from the Fed’s 12 regional banks pointed to the economy from mid-February through late March continuing to grow “at a modest to moderate pace.”

During periods of recovery, real GDP growth should be expanding robustly. Based on post-World War II history, real GDP should be growing in the 4.5% range. Overall, including recessions, the economy should be growing at better than 3%. Unfortunately, since the recovery began in mid-2009, real GDP growth has averaged a mere 2.5%.

From 2008 to 2011, real annual GDP grew by only 1.2%.

The same pretty much goes for job creation. It was reported in the Fed Beige Book: “Hiring was steady or showed a modest increase across many Districts.”

Again, the job creation numbers have been inconsistent and underwhelming during this recovery. As of March, according to the household survey, employment was still 4.6 million below its peak in November 2007. That just over four years and four months!

The problem with our economy has been and continues to be policy.

On the fiscal side, it’s about federal spending careening out of control, and tax increases, scheduled tax increases and the threat of even more taxes. It’s about hyper-regulation, including on the finance, health care and energy fronts.

But it does not stop there. It’s also about misguided monetary policy in place since the late summer 2008. The Fed has been focused on trying to use monetary policy to gin up the economy, which never works. Instead, it creates uncertainty and concerns over higher inflation. The value of the dollar suffers accordingly, and energy prices, particularly the price of oil and therefore gasoline costs, rise as well.

For good measure, with interest rates purposefully pushed so low by the Fed, banks actually have real concerns about lending money since rates inevitably are going to rise, especially when inflation accelerates. Banks would then be in the position of having long term loans at extremely low rates, and having to pay higher interest rates to pull in capital. That doesn’t work.

Modest to moderate economic growth simply does not cut it. The American people need far better. Indeed, they cannot afford to settle for less than what we should be experiencing, that is, robust growth with solid job creation. But that will require a shift in policy to lower taxes, smaller government, deregulation, and monetary policy exclusively focused on price stability. Indeed, if we do not get a dramatic policy change, it’s doubtful that “modest to moderate” will even be sustained.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.