There is no doubt that economic historians will puzzle over the 2008 global financial crisis for decades to come. There has been no quick fix. The long, lingering recession some had predicted has come to pass. Because of its unexpected nature, there is little consensus or clarity about what to do. The old nostrums are not working any more.
Not that this is surprising. There is in economics a law of diminishing marginal returns.
Things that work wonderfully well at the beginning of an enterprise become less and less effective as time passes. A key reason is that all economic and regulatory agents and actors and humans adjust. The first glass of wine tastes complex, subtle and fabulous. The tenth makes no sensory impact at all. The system has adjusted and all of life has become deja vu.
Under certain conditions low interest rates and loose monetary policy can stimulate economic demand, borrowing and consumption. They can also promote rapid expansion of production and supply as firms borrow money to expand. But at other times it can have little or no effect. This is one of those times. But governments have few options. Printing money is easy. Running a fiscal deficit and increasing national indebtedness is easily done. But what do governments do when all this does is increase debt and has little or no effect upon economic production and economic growth?
One solution to the conundrum is for governments to eat themselves. Governments can get so big, so intrusive, and have such a sclerotic effect upon an economy that the economy is effectively drunk and comatose. The West is that that point. Economists in France complain that the government (and the EU) is so intrusive that business cannot adapt, increase efficiency, or compete successfully. No government policy except that of cannibalising itself will have an effect. But rulers want to rule; governments want to govern. The last thing they want is to attack themselves.
Nevertheless we need an emergence of anti-government governments.
Here is a condign analysis of the situation in the US--well beyond the competencies of President Obama, the Democratic Party and most of the Republican Party to understand--such are their ideological blinkers--yet so simple and common sensical.
One More Time: Consumption Spending HAS Already Recovered
by Robert Higgs
Commentators and pundits, some of whom ought to know better, continue to harp on the idea that the recession persists because consumers are not spending. Every Keynesian seems to believe that because consumers are in a dreadful funk, only government stimulus spending can rescue the moribund economy, given (to them, at least) that investors will not spend more because the Fed, having already driven interest rates to extraordinarily low levels, cannot use conventional policies to drive them any lower and thereby elicit more investment spending.
People, please look at the data. They are conveniently available to one and all at the website maintained by the Commerce Department’s Bureau of Economic Analysis, the outfit that generates the national income and product accounts for the United States.
According to these data, real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak.
Real government expenditure for consumption and investment (this concept does not include the government’s transfer spending, such as unemployment insurance benefits and social security benefits) is also running higher than its pre-recession level. In the second quarter of 2011, it was running more than 2 percent higher (recall that this is “real,” or inflation-adjusted spending; nominal spending has grown substantially more).
The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak. This figure fails to show how bad the investment situation really is, however, because the bulk of the investment spending now taking place is for what the accountants call the “capital consumption allowance,” the amount estimated as necessary to compensate for the wear and tear and obsolescence of the existing capital stock.
The key variable is net private domestic fixed investment—the investment that builds the productive private capital stock. Quarterly data through this year are not currently available at the BEA website, but the annual data show that an index of its real amount peaked in 2006, fell substantially in each of the following three years, and recovered only slightly in 2010, when the index showed net private domestic fixed investment was running about 78 percent below its level in 2005 and 2006. Here is the true reason for the recession’s persistence.
Private investors, despite the full recovery of real consumer spending and the increase of real government spending for final goods and services, remain apprehensive about the future of new investments, especially new long-term investments. I have argued repeatedly during the past three years that an important reason for this apprehension and the consequent reluctance to make new capital commitments is regime uncertainty—in this case, a widespread, serious fear that the government’s major policies in areas such as taxation, Obamacare, financial reform, environmental regulation, and other areas will have the effect of depriving investors of control over their capital or diminishing their ability to appropriate the income that the capital generates. President Obama’s harping on the desirability of making “the rich” pay their “fair share” (that is, more) of the government’s ever-rising costs only exacerbates regime uncertainty. Business leaders have spoken again and again of how the present political environment is discouraging risk-taking and entrepreneurship.
In any event, it should be crystal clear that the problem is not the failure of consumer spending to recover. Let us please have more respect for the facts than to continue singing that old, thoroughly worn-out tune.
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