Commentary: Ky.'s recovery will mirror country's

The U.S. and Kentucky economies are still struggling, though there are signs that the downturn is abating. However, many impediments to a strong recovery remain, and how these play out is important in returning to robust growth.

After four consecutive quarters of decline, GDP increased by 2.8 percent in the third quarter. Much of this increase was because of "cash for clunkers," which probably comes at the expense of future GDP because so many potential buyers purchased vehicles during that time instead of over a period of months or years.

The employment situation is still bad, though the U.S. unemployment rate inched down in November, falling from 10.2 percent to 10 percent. This is still a high number, and some of the reduction is because of discouraged workers who stopped looking for work. The housing market is still off, but the stock market shows encouraging signs. The Dow Jones Industrial Average, after stalling around 8,000 in the spring, finally seems to be comfortably around the 10,000 mark. But this is considerably below its pre-recession level.

The unemployment rate in Kentucky for October (the most recent date available) was at 11.2 percent, a full percentage point above that for the United States. The upward trend in unemployment in Kentucky follows closely that of the U.S. economy, though. Since December 2007, Kentucky's unemployment rate rose by 5.7 percentage points compared with a 5.3 percentage point increase for the country. A similar story in reverse occurred during the economic upswing earlier this decade. From January 2003 to December 2007, the national unemployment rate fell by 0.9 percentage points and by 0.5 percentage points in Kentucky. Thus, we experienced somewhat less growth during the upswing and a somewhat greater worsening in the downswing. However, though slow, the housing market in Kentucky has been much more stable than for the United States.

Though Kentucky has its unique problems, the correlation between the Kentucky and U.S. economies is very strong and, at this juncture, the best thing for Kentucky is for the U.S. economy to recover. For that, we are reliant on federal policy. One pillar of federal policy is the stimulus package. Much has been written about the error-filled attempts to count jobs attributable to stimulus spending. But even if we correctly count jobs paid for by government spending and find a positive number, the important issue is what has happened to total employment. After all, the money borrowed to pay for government jobs could've been used to create private-sector jobs. That total employment has declined almost continuously gives no credence to the idea that the stimulus has helped.

In any discussion about jobs, it's important to remember that a good job is one that results in goods and/or services produced that someone values and will voluntarily buy. A boondoggle, make-work "job" is not helpful to the economy. The legitimate concern with government employment programs is that they are too much like the latter and not enough like the former. The converse holds for private-sector jobs because, to survive, private firms must sell what the employees produce.

To really invigorate the economy, the private sector must feel confident to invest and hire. This entails a stable policy environment where productive activity is rewarded. Much of the present policy atmosphere runs counter to this.

The greatly elevated level of deficit spending and government debt portend of much higher future taxes. Extraordinarily expansionary monetary policy by the Federal Reserve over an extended period of time has led to fears of high inflation. Neither is reassuring.

Other policy initiatives from Washington also create concerns and uncertainty. These include health care reform, climate change legislation and regulation of financial firms. All leave us in a very uncertain environment with legitimate worry that these various proposals will not actually work.

To get a really strong recovery, it's important to resolve these uncertainties and resolve them in a sensible way.