The Recession is a Painful Cure
Feb 5th, 2009
The U.S Government is about to do some fiscally irresponsible stuff to end the recession. I think this is a really bad idea. The American economy does have serious problems, but the recession is the fix for those problems, not the cause.
The real problems:
- We have been borrowing too much and saving too little
- We have been running a terrible trade deficit
- The ratio between those taking retirement benefits and those paying into them is rising quickly as boomers retire and life expectancies increase
- Our brightest have been going to work in banks instead of going to graduate school to study science and engineering
What if I told you that these things could be fixed? What if I told you that they are being fixed?
The savings rate had dropped to 0.4% in 2005. It is currently 1.7% and rising. Should we panic when the headlines read “Americans are Spending Less”, or should we celebrate?
The numbers for exports and imports for November came out a couple of weeks ago. There was much handwringing that exports were down. But imports were down even more. The trade deficit was the lowest it has been in five years.
As their homes and 401K plans have lost value, many older workers are considering delaying retirement.
Last year 515 people applied for admission to graduate programs at Tufts’ School of Engineering. This year? 616 people.
I know the recession is painful — lots of people are losing their jobs, companies are failing — but there is an important adjustment that we as a nation are undergoing. When the adjustment is complete, our economy will bounce back. The pain can be delayed by fiscal stimulus, but it can not be avoided.
But what about the unemployed people? Yes, I think we should do what we can to keep the unemployed sheltered and fed. Let’s say that by the end of this adjustment, we will have needed to feed and shelter ten million households for an average of six months. That would cost something on the order of a hundred billion dollars. That sounds like a lot of money until you realize that we’ve already spent a trillion trying to prevent a recession, and we are about to spend another trillion trying to end it prematurely.
Let’s do what we can to comfort the unemployed, but badly run companies must be allowed to collapse, and this recession needs to run its course.
Aaron,
I fully agree with your conclusion. Capitalism without bankruptcy is like religion without hell. You need something bad looming over you to make sure you work as hard as possible.
A.J.
Somebody needs to show this to Gordon Brown here in the UK. Even at the peak of the nations income from taxation, his spending exceeded it. And now he’s under the delusion that borrowing more on our behalf is the answer to the countries problems.
I always thought that the tweaking and tuning of interest rates designed to keep things heading upwards was taking us to an artificial, fragile high, and setting us up for a big fall.
I appreciate your perspective and definitely you know your econ much better than me. But let’s not forget who is taking the hits, who is sleeping on the streets and going hungry now. It’s not the folks who made the decisions that got us where we are, but they are the ones suffering. It’s easy for me to smile at your theory when I have a positive bank account and marketable resume. I guess I’m just saying, this all reminds me how the most vulnerable suffer most when the most powerful screw up.
Um, for an alternative viewpoint you might want to read http://www.ft.com/cms/s/0/4a44f222-f221-11dd-9678-0000779fd2ac.html?nclick_check=1
…or any number of other Martin Wolf columns over the last year; googling “liquidity trap” and “deflationary spiral” might also prove interesting.
We are on the verge of entering the part of the economic map that is labelled “Here be dragons.” The stimulus is about avoiding that — and only incidentally about easing the economic hardship for individuals.
I agree with you on the real problems and that they are being fixed on thier own. I fruther agree that the tax parts of the current stimulus plan are fiscally irresponsible, and will ultimately run counter to solving the problem of trade deficit when everyone’s $400 gets spent on cheap crap made in China.
But this stimulus plan also contains a lot of pork, which is mostly really great. For many, “pork” means spending money on stuff that makes no economic sense – things like public transportation, museums & other civic projects, high-tech power plants, and space exploration. For me, this is exactly what I would like our government to spend my tax money on – stuff that no (American) business would invest in, yet carries with it artistic/cultural/scientific prestige. So I was pretty irritated with the corporate bailouts for badly managed companies, and the bailouts for consumers who took on too much debt. But at least there’s pork.