Sunday, July 11, 2010

Economic recovery would have come naturally

Published in The Tennessean, Sunday, July 11, 2010

Economic recovery would have come naturally

by Richard J. Grant

The Obama administration's cheerleaders are having difficulty getting the crowd fired up about “Recovery Summer.” With unemployment stubbornly holding above 9 percent, and economic growth much lower than would normally be expected, expectations are depressed.

The trouble with Recovery Summer is that it should have come last summer. Economies are always in “recovery” in the sense that people are always adapting their business plans to changes in their expectations as market realities change. In macro terms, we can say that the economy began to recover in 2006 when real estate prices began noticeably to fall. In accepting such prices, home sellers were adapting to the reality of market demand.

We tend to see the falling wages, employment levels, and sales revenue that we experience during a recession as the problem. They hurt. But the pain is a symptom of the economic discoordination that existed before the collapse. The falling prices and changing business patterns serve to reveal the problem and to correct it.

All the Obama administration had to do was to let the recovery unfold naturally. But that did not fit their agenda any more than it fit that of their predecessors. Politicians always come under pressure to “do something,” or at least to be seen to be doing something.

Thus the new administration kicked off with gusto by playing the resource shell game they call “stimulus.” The idea was to pump up “demand” for goods and services in the hopes that we could make everything go back the way it was before the collapse. In other words, they tried to restore the pre-collapse situation (the height of the problem), rather than accept the changes that would have been the cure.

When the stimulus packages were rushed through Congress, they were described as urgent and essential. But, interestingly, much of the spending was withheld for later projects. Rather than spending all the cash in 2009, as stimulus true-believers were urging, much of that spending seems to be coming out a year later. Given that 2010 just happens to be an election-year, a cynic might stoop to describe the Recovery Summer as the “Summer of Pork.”

Politicians like “stimulus” spending because it can be used to channel resources in the direction of supporters and, more generally, it can give a temporary (albeit unsustainable) feeling of prosperity. With good timing, it can be decisive at election time.

The problem facing the Obama administration and the Democratic majority is that they tried to get away with too much, too soon. Rather than remember the advice given to medical doctors, “First, do no harm,” Democrats rammed through a massive, and largely incomprehensible, health-care reform bill. As businesses calculate the compliance costs, the effect is far from stimulating.

Rather than keep tax rates the same (or lower), previous tax-rate cuts will be allowed to expire at the end of this year. Although candidate Obama had promised that no one earning less than $250,000 per year would experience a tax increase, Democratic dithering in the face of record budget deficits will apparently ensure that this promise is broken.

The new financial reform bill, now in the lap of the Senate, is just as complex and stultifying as the health-care bill. This reform, as are most such reforms, is being sold to the public as a series of promises about the wonderful protections that it will bestow upon us. Like most campaign-style sales jobs, it confuses intentions with content. Far from protecting us from systemic risk, it will shift resources into regulatory compliance rather than customer service. It will inhibit innovation and diversity, and will disproportionately raise the costs of smaller financial institutions.

The tilting of labor law further toward the promotion of organized labor unions is another special-interest move that will increase costs and harm the majority of workers.

Recovery Summer’s pork won't stand up to all these job killers. How about “Recovery November”?


Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010