Free Markets, Free People

Donald Luskin

Another “Great Depression” or just a very slow recovery?

Of course you an find “experts” who will point to each and say that’s our future.   USA Today has a list of them in an article which explores the title question.  It appears most believe it will be the latter – a slow recovery.  But some are worried about signs that the present situation compares very closely with the 1930s.

And, in many ways it does.   We continue to see weakness everywhere.  And it appears until we get the housing market squared away (housing starts down 5% this month) and some other areas cleaned up, plus get some hiring going on, it is going to continue to be rough out there.

Jobs continue to be key to the recovery (we are a consumer driven economy – no job, no money.  No money, no consumption) so the faster we can employ the jobless, the faster we see the recovery take off.  However, that’s a huge undertaking:

The national unemployment rate stands at 9.5%, or more than 14 million Americans, says the Department of Labor, far below the peak unemployment rate of 25% during the Great Depression. But those numbers don’t fully convey the jobs weakness. Another 8.6 million people are working part time because they can’t get full-time jobs. And 3.8 million, discouraged by the dearth of job opportunities, are out of work but were not counted as unemployed.

So while not at 25%, we’re most likely somewhere in the 14% range in real terms (not the politically motivated U3 of 9.5%). 

"If you’re not making money, it’s pretty hard to spend it," or pay bills, Johnson says. "There’s no fuel in the economic engine to make it grow. People are spending less and saving more."

This, of course, is where the impetus comes from to claim if the people can’t spend, the government should.  We’ve seen, first hand, how that’s worked out – unemployment went up and stayed up.  And “more” wouldn’t have made any difference as is now being argued.

The answer isn’t government spending – not in a consumer driven economy.  No, the way you help solve this problem, if you’re government, is to incentivize business expansion and thereby hiring to drive consumer spending.  Instead, the policies of this administration, at least to this point, have businesses on the sidelines sitting on both their hands and their money.

Further crimping the outlook for future growth is the fact that cash-rich U.S. companies, despite improving profitability, are still leery of the recovery and are reluctant to deploy that money to grow or hire new workers.

"Companies have pared their expenses dramatically, upgraded their technology, improved their profit margins," Johnson says. "But they are not hiring more people, because they would have to see greater demand to do so."

Once again, the government can’t create that “greater demand” via “stimulus”.  That demand has to come from consumers.  Those are the customers businesses rely on to generate demand, and with about 14% in the unemployment/underemployment mix, that demand simply isn’t there – or, at least, not enough to expand and hire.

Catch 22?  In a way.  So what can government do? 

Cut business taxes.  Get out of the way.  Provide incentives to expand and hire (accelerate capital equipment depreciation for instance, if bought now).

There are lots of ways short of spending us into oblivion that the government can positively effect the market and the business climate.  Unfortunately, as Mort Zuckerman has stated and the business community as a whole believe, we have an “anti-business” administration in charge right now – and that further unsettles the situation.  Perception being reality, as long as the business community believe that, not much is going to change.

So, there’s your day’s sunny outlook on the economic front.  As Donald Luskin says:

"The only way to get out of debt is to earn money," Luskin says. "The only way to get out of recession is to grow. If you kill growth, you are" in trouble.

And right now, we’re in trouble.

~McQ

[ad] Empty ad slot (#1)!

[tweetmeme only_single=”false”]