Sunday, February 28, 2010

The Economy Has No Friends

Economic recovery, if there is any, is very, very slight. Normally, the economy should be growing at an eight to nine percent real annual rate during the early stages of economic recovery. The US is probably growing at half that rate. What is there to do?

Economists aren't much help. Republican economists advocate tax cuts; Democratic economists advocate spending increases. The science of macroeconomics is, in reality, a religious conflict between Republican and Democratic economists. There is not much science in macroeconomic science after all.

Capitalism seems to suffer booms and busts throughout history. The last few years are not exceptional. Historically, governments have done little that has helped, when economies have weakened. The Great Depression in the United States is probably the most famous example of government's failure to bring about an economic recovery. During most of the 1930s, the government interfered in the workings of the economy in a way that made businessmen frightened of the future. A similar fear of the government pervades the American business community today.

As economists, we aren't sure what pro-active steps one can take to get an economy rolling, but it is not likely that higher taxes, demonizing rhetoric, heavier business regulation, and large budget deficits are the answer. If the President and the Congress would take a twelve month paid vacation, we could probably make a start toward recovery. There is simply too much government, too much regulation, too much national debt, too much demonizing rhetoric from the White House, and too much fear of the future, to get the economy off rock bottom.

Reliance on government has never produced an economic recovery. Apparently, no economist is willing to admit this openly. But the facts are pretty clear. Recovery requires an enthusiastic business community. That is simply not in the cards, given the current political environment.

So, look for the economy to remain stagnant. There will be positive growth, but it will be the slowest on record for an economic recovery. It will take major changes in the political environment before any kind of serious economic recovery can begin.