How Much Growth is “Enough”?

A 3% growth rate has historically been the Fed’s unpublished benchmark for the United States economy.  This was considered “goldilocks” growth, with the economy not too cold (which leads to high unemployment) and not too hot (which leads to high inflation).  Usually when we come out of a recession, the economy has a mini-boom, growing above the 3% rate.  This helps us to make up lost ground.  So we need at least 3% growth and probably closer to 4% growth to see significant healing in the U.S. economy and a decrease in unemployment.

The recession we just experienced was one of the worst in 80 years.  Economists were hoping that the recovery would be just as dramatic but that has not been our experience.  The economy is growing but not at a rate that it feels like it to the average American, especially if he’s unemployed.  2% growth doesn’t lead to high inflation, but it doesn’t lead to low unemployment either.

We’ve expended a ton of monetary ammo on the economy (this is the Federal Reserve’s contribution to economic viability).  Congress has spent more money than has ever been spent by our government in its history… but on the wrong things.

The driver that will lead to economic growth is small business.  The two factors that have the largest impact on their viability are taxes and legislative burdens (i.e. healthcare).  There is a fair likelihood that we will avoid a double dip recession.  But their is also a fair likelihood that we won’t. I think the expiration of the Bush tax cuts in January 2011 could be the most likely catalyst that would push us into another recession.

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Filed under + Economics, Politics and Financial Planning

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