Tag Archives: The Economy

More Evidence of Failure

According to some Economists, the recession ended in June of last year, before the “stimulus” money started hitting the economy.

So why no recovery?  The article points out one big reason:  Uncertainty.

How slow? The Organization for Economic Cooperation and Development figures the U.S. economy will grow 2.6 percent this year. It would take growth twice that fast to drive down unemployment by a single percentage point.

Unemployment usually keeps rising well after a recession ends. That’s because it takes time for companies to gain confidence in the economy, know that customer demand will last, and add jobs.

But for the past few recessions, it’s taken longer and longer for unemployment to come down. In 1982, for example, unemployment peaked the same month the recession ended. After the 2001 recession, the gap was 19 months.

This time around, it’s been 15 months, and economists don’t expect unemployment to come down significantly anytime soon.

Companies are always a little uncertain coming out of a recession.  Coming out of this one, much like coming out of the recession in the early 30’s that became the Great Depression, government has created additional uncertainty.  That will prolong the recovery at a minimum, and might send us back in to another recession.

And the administration and Congress can only think that expanding the role of government and making things even more uncertain is the only answer.

It didn’t work in the 30’s, and it won’t work this time.  What will work is eliminating the uncertainty so businesses are confident they can grow again without unexpected government intervention and increased costs.


Not Solving the Problem

Please don’t take this the wrong way, as I’m all for reducing the tax burden on small businesses.  But The One is not of a great economic mind, even though everyone seems to think He is all knowing.

The problem most small businesses face is not one of a lack of cash.  The problem also isn’t that a credit crunch is keeping small businesses from growing, as they certainly are able to finance growth through borrowing.  Alas, small businesses, as well as lots of big businesses, are holding (hoarding) cash.

The reason companies are hoarding cash and not growing, which is very odd, has to do with all the other stuff the Administration and this Congress have done.  Companies are not going to grow, and they are not going to hire people, when they have no idea what the costs of those investments (or the tax rate on the returns of those investments) will be.

No one knows what the health care mess is going to cost (other than knowing the answer is ‘more’.)  No one knows what Cap and Trade might do to tax rates.  No one knows if they will start taking the private property of businesses or individuals in addition to taking income.

Put that on top of the uncertainty on the demand side of the equation, where individuals are also hoarding cash instead of buying stuff (in the case of the wealthy, for the same reasons as businesses), and you get a nice little cycle of worry that slows (stops) recovery.

It all traces back to the madness we’ve seen these last 18 months.  And while tax breaks to businesses certainly won’t hurt, I don’t think they will help in this case.  (Which will be fodder for the 2012 elections, as the Left will point to the failure of tax breaks to fix the economy as a reason to raise taxes).

The only way we see things get started again is a sweep in November to remove power from the Democratic party, and the overturn of the health care bill in the courts.  When that happens, tax breaks on investment will be welcome and effective.

Quote of the Day

Comes from an outstanding post by Thomas Woods at Takimag.  Mr Woods very nicely takes issue with the ignorant Left blaming the free market when government fails; he also picks on their inability to understand significant differences of opinion of many ‘free market’ economists. 

Notice: it’s the fault of the free market when the government modifies the government-established rules of a government-established institution, while its deposits continue to be guaranteed by the government. Got it?

Take the time to read the article.

Via Samizdata

Confidence Follows Correction

Mario Rizzo at the Freeman has a fantastic piece up.  I suggest you read all of it, but here is an excerpt.

Recessions are not simply crises of confidence or of insufficient demand (due to increases in the demand to hold money). They also have their allocational—or microeconomic—aspects. I suggest that these systemic distortions have an important role in creating the aggregate phenomena we are witnessing. To treat these distortions and their cure as relatively unimportant is a mistake. Lasting investor and consumer confidence follows the correction of the underlying causative distortions and does not precede them. In fact, the dominant macroeconomic policy framework does not leave room for correcting distortions at all because its basic theme is to restore, prop up, and maintain the current direction of resources.

The hastily approved macroeconomic schemes of the Bush and Obama administrations will not succeed in promoting lasting recovery because they ignore the microeconomic fundamentals. The direction of spending and hence resource allocation they generate are fragile—they are not consistent with the preferences of consumers, savers, and investors. Therefore, once the putatively temporary stimulus is complete, the corrective forces that are now trying to undo previous resource misallocations will reassert themselves.

Emphasis is mine.

The key point he illustrates is Keynesians and Macroeconomists focus too much trying to fix something they can not possibly know enough about to fix. The knowledge is dispersed among all of us acting in our own interests, putting resources to their best use. There is no way a central planner can know how to use all of these resources, nor do they really care. They simply want to prop up the result, ignoring the sustainability.

This is why instead of propping up failing companies, we need to allow them to fail, and allow their resources to be reallocated freely to uses that produce profit (success!).  I don’t want to minimize how confusing all of the financial stuff that was going on – I don’t get it, and Macroeconomists do.  Clearly to me, the solution lies not in propping up a failing industry, but instead allowing it to collapse and emerge stronger.  Let those who chose not to participate in the schemes, those who planned, lived beneath their means, bought what they could afford, and remained solvent enjoy the fruits of those choices and thrive.

Link via Cafe Hayek

Sometimes, you need to trust your intuition

Penn Jillette on Obama turning into the skid.

I trusted my Dad that turning into a skid would work. I trusted my carny mentor, Doc Swan, that closing my mouth around a burning torch would put it out. They were right. Maybe the United States borrowing more money than I could imagine in a billion years with a billion computers and a billion monkeys typing on them, will get us out of financial trouble. I really don’t know. It’s certainly true that many counterintuitive things are true, and when you have the guts to do something counterintuitive that works, it’s really cool. It’s a superpower under our yellow sun.
But there are some things that are just intuitive. Did you know, that if you’re going 100 mph, directly at a very, very thick, reinforced concrete wall, and you speed up, so you’re accelerating right when you hit the wall that the accident you have is going to be much worse than if you’d jammed on the brakes as soon as you saw the wall at the end of the street? Did you know that? It’s exactly what everything you know and feel would tell you, and it’s exactly true. Most times when you’re driving, or playing with fire, or handling money, the thing that makes sense to you is also true.

Intuitively, we’re headed for the wall… we aren’t going to spend our way out of debt, and giving a failing government more power isn’t the answer.
But you already know that.

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