What Happened to the Economy?

In 2006, the American economy entered a recession, which was abruptly amplified by the financial crisis of Fall 2008, with the collapse of Lehman brothers, AIG, and dozens of banks. For years job losess were getting worse and worse, reaching a point where the American economy was shedding about 800,000 jobs per month.

Government intervention into the crisis, begun under the Bush Administration, prevented a Great Depression-scale crisis, and under the Obama administration, job losses began shrinking. Over the next year and a half, job losses steadily got smaller and slower. In September 2010, the econonmy actually started to add jobs, and has added jobs every month since.

That may end soon, as the job growth has slowed dramatically in the last two months. This means that this is the first two months in which the job trends have been going in the wrong direction during the Obama administration. The rate of change in jobs added to the economy essentially flatlined over the previous six months, and the 57,000 jobs added to the private sector in June certainly is disappointing. So what may have caused this reversal?

So far this year, local and state governmetns have shed 355,000 jobs. This comes mostly from state and local political inability to ask for higher taxes from the citizens. In many states, the decline of revenues is tied directly to the decline of the housing market, as many states rely primarily on property taxes for revenue. In other states, such as Wisconsin, newly elected Republican legislators began giving tax cuts to corporations and wealthy patrons, firing public servants to fund the massive corporate welfare schemes.

The long-term economic effects of these efforts is far from being realized, but the short-term effects are obvious. Fewer teachers are being paid (the largest job loss sector is in public education), and they are spending less in the economy. Republicans have sapped national demand for new products and services, which has taken the stuffing out of the economic revival that the President and a Democratic Congress encouraged over the last two years. It's no wonder that in the 6 months since Republicans have taken over state houses and governors' mansions as well as the U.S. House, a lot of the power of the recovery has dissipated. Republicans on the state level have gutted the engines of short-term growth (including health care programs, nutritional assistance, housing programs for the poor). The only surprise about this economic slow down is the speed with which it has occured since the Republican takeover.

The White House prefers to talk of "economic head winds" created by large-scale, far flung economic problems, like worry over the Euopean debt crisis (crises?) and the continuing economic devastation of Japan (which has interrupted American manufacturing too). Yet the American economy has added over a quarter million jobs in manufacturing since the beginning of the year, the strongest six-month growth in that sector in a decade. It's a decent explanation, and there may be a grain of truth to it. But May, the first month that hiring really took a tumble, was also the first month that Republicans seriously threatened to block payments to American creditors in a political fight over the debt ceiling. It was the first month in which the American government turned its attention to 'defecit reduction' which will likely cause another contraction of demand. If businesses are looking at economic trends and making smart decisions based on the information available (and this is the theoretical basis of microeconomics, mind you), we would expect a massive stall in hiring for May and June.br />