Sunday, October 2, 2011

A Concise Description of Our Slow Recovery And How to Restore Employment

This article provides a succinct explanation of the slow recovery from recession in the US. Recoveries from balance sheet recessions look just like this recovery. Households took on too much debt, and paying down that debt reduces consumption which is 70% of the economy. It makes no sense to compare this recession with our most recent recessions, that had a sharp recovery, and to argue that the slow recovery is due to the lack of business confidence in the current administration. We expect that kind of argument from politicians, but we should expect more from economists who know better, but have decided to back up the claims of their political allies.

If we take the advice of those who argue that federal spending should be cut to the level of tax revenue, spending would have to be reduced to 14% of GDP. A cut in federal spending of that magnitude would sink the economy into a deep recession. That's what happens to an economy when households, business and government all cut spending at the same time.

Once we reject the explanation of this recovery provided by politicians, who are primarily interested in winning the next election, we can focus on our real problem. When households and business are not spending the only option is for government to raise its level of spending. Government can borrow at low interest rates and invest in the infrastructure that the economy will need going forward. That will help to restore the economy and provide the opportunity to reduce future deficits as tax revenues grow with the economy, and federal spending can be cut back when it is no longer needed to support an economy in recession. That is what we should do. The only real question is whether our political system is capable of doing what is right for the American people.

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