Economic Business Cycle vs. Stimulus Plan

Even Ray Charles can see we’re in a recession.  The question is “how much longer will it be?”  Politicians and talking heads compare our current situation to the Great Depression an average of eight times a day (I just made that statistic up but it’s probably close to reality).  This characterization is inaccurate and irresponsible but highly effective in scaring people.  The closest comparison to our current “economic malaise” (do you remember who coined that term?) goes back to the late 1970’s and early 1980’s.  By the way, the policy response that ended that malaise was to cut taxes.

The policy response Congress has adopted is the modern-day version of the New Deal, only five times bigger.  Though much of the stimulus package is really a power grab by the federal government, some of the spending will trickle down resulting in GDP growth. I just don’t know how long it will take.  Neither do they. But the likelihood they will get re-elected is much better because they got to steer where the money ended up.

The good news is that we are at least a year into this global recession anyway.   That’s good news because we know from history (which doesn’t repeat but often rhymes) that the average recession lasts 14 to 16 months.  Well, we’ve already accomplished that.  Normally, once you’ve figured out you’re in a recession, it’s already started to repair itself.  At least that’s how it works in a market economy under normal conditions, which, admittedly is not our current situation.

So let’s assume this is an “above average” recession scenario that will probably go on 25% to 50% longer than the average.  Even if Congress did nothing, the global business cycle would have healed and corrected over time, but we don’t really know how long it would have taken or how painful it would have been.  We’ve been told it would have been the end of Western civilization, but I’m skeptical about that scenario. My guess is it would have worked itself out over another 6 months to a year, which isn’t fun but we can’t control it.

It was very shrewd of the majority party to ram this legislation through Congress without substantive debate.  If even a portion of it is successful, which is likely to happen, they’ll get credit for building GDP, which they should.  If it doesn’t heal the economy in a timely basis, they can still blame George W. Bush, and they will.  But the cost of socializing the American economy has placed a formidable secular headwind to the future prosperity of our country.  What I mean by that is that there comes a point in every successful entrepreneur’s life where he or she will decide, “I don’t want to work that hard, to make those sacrifices to make more money, to pay so much more in taxes.  It’s punitive and it’s just not worth it.”  And when that happens, we all are poorer as a society.  The reason we are poorer is that their sacrifices produce something, a good or a service, that we as a society would benefit from either by consuming it or as an ancillary effect.

Despite these headwinds, the global market economy will heal and it will grow and prosper again.  Every day in the United States, in India, in China and in Europe someone is working hard and sacrificing to make ends meet, to make a living, to feed their families and make better opportunities available for their children. This is the essence of entrepreneurship  and the human spirit can accomplish amazing things if our economic policies allow them to happen.


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Filed under + Economics, Politics and Financial Planning

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