A Self-Sustaining Recovery

Editorial in The Economist, “Can it be…the recovery?”

“For the year as a whole America’s economy will probably grow around its trend rate of around 2.5%.  That’s a lot lower than might be expected after a normal recession; but after financial crises, when consumers are weighed down by debt, recoveries tend to be anaemic.  That level of growth…could be the first step towards a self-sustaining recovery, thanks to the virtuous circle of stronger job growth leading to higher consumer spending, which in turn should generate more jobs.

“America’s priority should be to craft a medium-term plan which puts the budget deficit on a downward path without snuffing out the recovery.  There is, unfortunately, not a chance that it will do that before November’s presidential election.

“The reasons for optimism are real.  But if policymakers get it wrong again, the recovery could yet turn to dust.”  Emphasis added.

That phrase “self-sustaining recovery” captures my problem with both parties.  For me, the Democrats don’t know when to stop the government spending, while the Republicans don’t know when it’s necessary.  I believe in stimulus to get a recovery going, when consumer spending isn’t there, but when that recovery become “self-sustaining,” I want less government.  I believe that “expansionary austerity” isn’t just an oxymoron, it’s a dangerous and delusional myth.

The New Greek Myth

The Greek myth of “expansionary austerity” continues to be accepted as reality as the Greek government agrees to more cuts to try to avoid a default next month.

These new cuts (in the minimum wage, public sector employment, private sector salary increases) come as unemployment in Greece has reached 21%, and the economy continues to shrink.  Greece’s economy is expected to contract by about 6% this year, having already contracted almost 12% between 2009 and last year.

More cuts mean more unemployment, more contraction in the economy, and still higher deficits, which then lead to more cuts.

Greece needs policies that will promote growth, which in the short term means more government spending, not less.  Greece needs to leave the euro zone, which it never should have joined in the first place.

This is the counter-productive economic policy that we all thought the Great Depression had taught us to avoid.  It’s baaaaaaack!

And dumb decisions made in Athens today could bite President Obama in the tush on November 6.