Clever Ideas to Fix the Economy

Yesterday’s stock market didn’t seem to give a darn but last Friday a notable revision was made.  An important economic mile marker was shifted down and to the right…realigning the economy onto the road to recession.

According to the Commerce Department, U.S. GDP increased during the second quarter at a 1 percent annual rate – not 1.3 percent as initially estimated.  While this is better than the 0.4 percent GDP increase during the first quarter of the year, this puts economic growth for the first six months of 2011 at just 0.7 percent.  Additionally, year-over-year GDP has fallen 1.5 percent.

From what we gather nine of the past 11 recessions in the post-World War II era have followed a period of GDP growth of 1 percent or less.  Perhaps we are about to make it 10 of the past 12.  Obviously, the economy’s slowing down; not speeding up.  And everyone knows it…

The Michigan Consumer Sentiment index, reported last Friday, was extraordinarily dreadful.  The index fell eight points to 55.7 in August, from 63.7 in July, to its lowest level since November 2008.  What’s more, the index has fallen almost 20 points in just three months.  In an economy where consumer spending accounts for 70 percent of growth, GDP will likely follow consumer sentiment down.

But that’s not all… Continuing down the road to recession were the latest jobless claims reported by the Labor Department.  For the week ending August 20, claims for U.S. unemployment increased by 5,000 to 417,000.

In short, this economy stinks.  What gives?

Economic Stink Eggs

For one thing, while the Great Recession officially ended in June 2009, it did not really end.  Massive amounts of government spending and Federal Reserve finagling with the money supply may have pushed GDP into the positive for a couple years, but it did not fix anything.  The government stimulus did not produce real economic growth.

In fact, by visibly directing the hand of the economy with insane quantities of government spending, the dolts in Washington inhibited growth by diverting money flow from productive activities.  Now the stimulus is gone and the economy’s as lethargic and indolent as it was before the grand plan to save the people from themselves was ever initiated.

Of course, the government can’t create real jobs.  By real, we mean jobs that are productive.  For the government doesn’t produce anything.  They have no resources of their own.  Everything they spend must come from their productive citizens or be borrowed from the future.

But the government loves the control of Keynesian economics.  They get a great thrill out of getting in the middle and making a mess out of things.  They puff out their chest and raise their chin when a frustrated populace begs for them to do something – anything – to fix the economy rather than let it adjust to the realities of a post credit induced boom.

So now that the economy has burned through the stimulus and laid another stink egg the best and the brightest are laying out their next plans…

Clever Ideas to Fix the Economy

Clever fellows, no doubt, have clever ideas on what to do next.  They want to do more of what didn’t work before.  They want to fix the economy by spending your money.  They want more Keynes.  Here’s what we mean…

Several weeks ago Nobel Prize economist Paul Krugman remarked that a massive spending program to counter a space alien attack would end the economy’s slump in 18 months.  “There was a ‘Twilight Zone’ episode like this in which scientists fake an alien threat in order to achieve world peace,” said Krugman.  “Well, this time, […], we need it in order to get some fiscal stimulus.”

President Obama has some grand ideas too.  He’s scheduled to announce a new job creation plan after Labor Day.  It is anticipated that a centerpiece of the plan will include a spending bill to build roads and bridges.  In other words, Obama wants more Keynes.  He wants to create jobs by spending your money.

You know where this leads.  After much ballyhoo and gusto the stimulus appears to pick the economy up for a brief period and then it falls flat on its face…with a blown out public debt to boot.

If the politicians really wanted to do something to improve the economy they would stop being so clever.  They could cutoff the government directed stimulus and allow the invisible hand of the market to direct capital flows to the most productive enterprises. They could reduce government regulations, cut taxes, and let the most productive citizens flourish and create real jobs.

But that would require real wisdom, restraint, humility, and political sacrifice by the President and Congress.  These are things that have been lacking in Washington since, perhaps, Silent Cal was in office.

Somehow, someway, Coolidge and his cohorts cut taxes and spending and, wouldn’t you know it, the economy grew by an average of 7 percent per year while in office.  On top of that, they used the budget surplus they garnered from their low tax small government economy to pay down 25 percent of the total public debt.  Well done.


MN Gordon
for Economic Prism

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