Not-so-innocent bystanders

This Wall Street Journal piece has generated a fair amount of discussion this morning, and though it doesn’t exactly break new ground, the news is consistently discouraging.

The world’s largest economy may be facing a growth problem.

After a disappointing first quarter, economists largely predicted the U.S. recovery would ramp back up as short-term disruptions such as higher gas prices, bad weather and supply problems in Japan subsided.

But there’s little indication that’s happening. Manufacturing is cooling, the housing market is struggling and consumers are keeping a close eye on spending, meaning the U.S. economy might be on a slower path to full health than expected.

“It’s very hard to generate a rapid recovery when rapid recoveries are historically driven by housing and the consumer,” said Nigel Gault, an economist at IHS Global Insight. He expects an annualized, inflation-adjusted growth rate of less than 3% in coming quarters — better than the first-quarter’s 1.8% rate, but too slow to make a meaningful dent in unemployment.

The WSJ report was published before a new report showed home prices reaching five-year lows, “driven down by foreclosures, a glut of unsold homes and the reluctance or inability of many to buy.” It also comes on the heels of new forecasts showing weak growth economy-wide this quarter.

Under sane circumstances, policymakers would see all of this and respond with a renewed focus on improving the economy, giving it a much-needed boost. But that’s not going to happen. Policymakers are content to simply watch the economy stall, playing the role of not-so-innocent bystanders unwilling to act when action is necessary.

Indeed, we instead see one top Federal Reserve official — Thomas Hoenig, president of the Federal Reserve Bank of Kansas City — calling for an increase in interest rates so that the economy will grow even slower. To be sure, Hoenig has an uninterrupted track record of being spectacularly wrong, and his call for higher rates will likely be ignored, but this is the mentality that we’re dealing with. The Fed could act to improve economic conditions, but instead we’re left to hope that it declines calls to make things worse on purpose.

And then there’s Capitol Hill, where Republicans are convinced we’ll all be better off after they’ve taken money out of the economy, made unemployment worse, and pursued a monetary policy that makes it harder for the world to buy American products.

Best of all, conservatives will no doubt see the weak recovery as irrefutable proof that Democrats have the wrong economic policy.