From the November 8, 2009 Sunday Times (London)
November 8, 2009
by Irwin Stelzer
There are times when the economic data point in one direction, and businessmen in the privacy of their boardrooms point in another. A case in point is the recent report that the recession is over — the housing and manufacturing sectors are recovering and, as many categories of goods sell at the most robust pace in a year, retailers have sheathed the hara-kiri knives they had sharpened in anticipation of a gloomy holiday season. Even retailers in recession-hit California are beginning to believe there just might be a Santa Claus.
“I’ll believe it when I see it on my top line” seems to be the attitude of most businessmen, who are hoarding cash in record amounts. The Wall Street Journal estimates that corporate cash hoards now total more than $1 trillion, or about 11% of assets, compared with $846 billion, or less than 8% of assets not much more than a year ago. Show us the demand, not statistics about the demand, corporate executives seem to be saying, and we will dip into our ample treasuries and begin investing and hiring.
This might in the end be very good news indeed, and provide evidence to help resolve the question of the durability and speed of the recovery that seems to be under way in America and many other countries. You know: which letter of the alphabet do you most believe in — the V of a rapid recovery, the W of a double-dip recession, the U of a bumping along before recovery takes hold, or any other part of the alphabet soup that is on the menu of all forecasters these days.
Lest you put too much faith in economists, consider their record at the time of the recession of 1982. As David Leonhardt reports in The New York Times, the recession seemed to be ending in the autumn, but the unemployment rate was heading to 10%. Economists worried that “the recovery may amount to nothing more than a few quarters of paltry growth — and possibly not even that [and] had growing doubts about whether the mechanisms of economic recovery will — or can — operate as they have in other business cycles”. The economy, no respecter of economists’ forecasts or worries, proceeded to grow at the rapid annual rate of 6% for the next two years.
This might provide some perspective on the latest job report, showing that the economy lost another 190,000 jobs in October, taking the unemployment rate past the politically sensitive double-digit mark, to 10.2% — about where it was right before the rapid economic growth of the early 1980s.
It seems possible that the pieces just might be in place for a similar rapid recovery. The pile of corporate cash is available for investment and hiring at the first signs of a durable recovery in consumer demand. Inventories are low enough to encourage restocking, especially as the holiday season now seems likely to be merrier than expected.
The dollar is weak and weakening, which should encourage exports and discourage imports, meaning more jobs for American workers. The Federal Reserve Board’s monetary-policy gurus met last week and the inflation doves routed the inflation hawks — for those who don’t follow Fed internal disputes, this means that those who see no threat of inflation, or of a rise in inflationary expectations, and who believe that the excess capacity in the economy will keep prices from rising, are in the driving seat of policy making. Which means low rates for the foreseeable future.
All of that should add up to a decent recovery, finally reversing the job losses — unless ... There is a nagging fear among those who closely watch not only the economy but government policy that these nascent economic forces might be murdered in their crib by the administration.
Small-business owners I have been meeting this past week tell me they are in a state of paralysis as they follow the debate over the healthcare “reform” bill wending its way through Congress. Lurking in its 1,501 pages (the Senate version) are provisions that will markedly raise their costs and their personal taxes. So even as business gets better, they won’t take on more staff.
Then there is the turmoil over all aspects of the financial-services industry. The bonus brawl is the most widely publicised, with bankers somehow stunned that the public should resent their record takings after being bailed out — in cases such as Goldman Sachs, continuing to benefit from government guarantees of their debt.
More important, indecision on how to reform the financial sector continues to weigh on growth, as banks develop ever tougher restrictions on credit availability while they wait to see who wins the battle between the Obama White House, which wants to give more power to the Fed, and Congress, which wants to gut the Fed and give the Treasury authority to close down any financial institution it deems unfit for purpose.
This is no small matter, as the partly non-political Fed is less likely than the completely political Treasury to move against an institution for purely partisan political reasons.
Then there is that old bogey, taxes. Economists who have the administration’s ear just do not believe that higher marginal tax rates will slow economic growth. They are flirting with an effective 60% rate on the incremental income of very high earners or, in the case of congressmen searching for a way to fund the president’s $1 trillion healthcare plan, a “millionaire’s tax” in the order of a 5% surcharge on the taxes of anyone earning that sum.
This is in part due to a belief that markets don’t work the way traditional economists believe, that money incentives do not drive risk-taking and hard work, and therefore appropriating a larger portion of national income for the state will not affect the growth rate.
So when deciding which letter of the alphabet seems the more plausible description of the shape of the current recovery, you have to weigh the positive signals from the economy against what some, myself included, believe to be the long-term negative impact of the policy errors that are in store for us.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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