Why is the Recovery So Slow?
The short answer is, “Nobody knows for sure.”
Keynesians like Paul Krugman believe the stimulus was too small. That view, however, seems based more on blind faith in the Keynesian model than on a calm assessment of the evidence, which does not make a strong case that spending boosts the economy.
An alternative view is that the economy expects substantial tax increases going forward, and taxes are a drag on economic activity. Taxes are likely to rise in the short term as some or all of the Bush tax cuts expire. Taxes are likely to rise in the long term as the U.S. attempts to grapple with its sky-rocketing debt.
More broadly, the slow recovery may reflect pessimism about the focus of economic policy - redistribution versus productivity – and the uncertainty generated by the administration’s interventionist tilt.
The best hope for improvement, in my view, is enough Republican victories in November to produce gridlock in Washington. It’s not that the Republicans are so great on economic policy, although on balance they are probably a smidge better than the Democrats. It’s that doing nothing is likely to be better than whatever new policies a Democratic controlled Congress would generate.
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dfvazan
I couldn’t agree more; gridlock protects us from gov’t expansion better than either party. But Republicans “are probably [only] a smidge better” on economic policy? If we’re ever going to see a flat individual income tax, elimination of the corporate tax, permanent repeal of the death tax, more free trade, weakening of labor union monopolies, etc. it’s not going to happen on the watch of Democrats. Republicans have gotten many things wrong, but they outperform Democrats on the economy significantly more than a smidge.
Steven Handel
Just over the past week, a $26 billion stimulus for teachers was approved by the senate, as well as an increase in food stamps. We currently have more Americans dependent on food stamps than ever before. It seems the government keeps trying to do patchwork after patchwork as the economy becomes increasingly more unstable. They see a leak somewhere in the economy, and then they put a band-aid on it…than the pressure builds somewhere else, and another leak, and another band-aid.
We (as society and government) need to focus more on the foundational institutions of prosperity, rather than trying to maintain the current level of consumption which has proven to be unsustainable. There will be some pain, but we will all be better off in the end.
OnePlusOne
The recovery is slow because it is happening against a backdrop where the US is transitioning (or has already transitioned) to permanent, European style slow growth rates.
The obvious main cause of this slowdown is decreased incentives to production due to the widespread feeling that the correlation between what one personally produces and his standard of living is getting weaker and weaker by the day — and will get even more so in the future — as poverty will be further subsidized while high productivity will be further penalized by increasing direct and indirect taxes. So, simply stated, in such an environment, why work? Or, at least, why work as hard or as smart as before? Especially in difficult, mentally challenging, high value added endeavors? Hence the decreased personal incentives to produce and resulting permanent slow economic growth.
Under the new decreased incentives to production, everything will be slower. Permanent baseline growth will be a European like 1.5-2% as opposed to the more recent American 3.5% historical average.
This change in economic dynamics is, in my view, permanent. There is no “Oops! We made a mistake, let’s undo it”. After all, no European state has ever been able to recover from the transition to welfare state. Even before the creation of EU, when every European state was still able to, more or less, control its own socio-economic destiny, no European country was ever able to retreat from the welfare state. If the US is able to pull off an eventual retrenchment from the Welfare State, then my hat is off to Americans – I will be reason enough to believe in American exceptionalism once again.
Today America’s poor are still at prosperity levels within the top 10-20% on a worldwide scale. After the compounding effect of 20-30-50 future years of 1.5% US growth, in a world that grows by 4% annually on average, where will they end up? In a world that grows at 4% on average (not to mention China and India which are growing at 6-10%), the new America of “change” and “hope” will be loosing competitiveness by an additional 2.5% every year.
The bottom line is:
Americans either remove the production dis-incentives and return to permanent and sustained 4% annual growth or they fade away into worldwide economic and (by extension political) averagedom as the rest of the world catches up to them. It’s just as simple as that Mr. Krugman.
More generally,
The Western nations’ status at the top of the worldwide prosperity pyramid is doomed. Westerners either wake up and restore personal incentives to production that can sustain 4% growth rates, or they perish into economic and political worldwide marginalization! It’s just as simple as that Mr. Krugman.
Jesse Livermore
Gridlock (2006-2008) does not produce jobs. Neither did the lowest personal income and capital gains taxes in generations, Nor did: low interest rates, non-existent inflation and deflation, fixed labor costs, manageable oil prices, increasing worker productivity, a bullish market for equities and an influx of foreign capital. ZERO net job creation for nearly a DECADE now. ZERO increase in wages. We should be careful citing things already in place as the likely forces that will produce now, what they failed to bring for the longest stretch since World War II. Whatever is going to turn the ship around are issues that are not being addressed, name trade policies and education for our future work forces.
Murat Guven
Lets face it, no ‘expert’, policy advisor, republican, democrat, flat-taxer, tea-partier has any ideas that will produce real change. Each idea is monopolized by the supporters of the conceptor. We know that taxes are going to go up – its practically written on the wall. Either the democrats will raise them or the republicans will raise them. An introduction of a tax is government spending; likewise, every tax cut is government spending. What we as citizens MUST DEMAND is a better return of our dollars in terms of the services provided. We should be able to question government empoloyees (local, state, federal) without the threat of punitive action. I am beginning to feel that like businesses, the government and its employees are more concerned about protecting their markest share than serving the people (which should be the operating philosophy of business but not governemnt).
Please note as well, that every fee and every penalty (ie, parking tickets in NYC) is a tax to generate revenue. And obviously, the revenue is misspent.
Marc
On what economic theory do you base “taxes are a drag on economic activity?” During the Clinton years taxes were much higher, and the economy was booming. Clearly, you have some explaining to do.
Or are you simply against taxes and want to convince people (or yourself?) by stating, without any evidence, that taxes have bad consequences?
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