Don’t Overreact to Bumps in the Economic Recovery
This article first appeared in the St. Louis Beacon.
Determining when business cycles start and end is a tricky call. Recently released GDP data indicated that the economy expanded during the second quarter of this year at a healthy 3.5-percent rate. This is quite a turnaround from the 6.4-percent decline in GDP during the first quarter. And, as expected, optimism in our economy is being restored, even if gingerly. Before all the champagne bottles get uncorked, let’s raise a few cautionary flags.
First, how much of last quarter’s expansion was fueled by one-time gimmicks? GDP is driven by sales. The cash-for-clunkers program, for example, rearranged the timing of car purchases. Purchases that may have occurred over six months were accelerated into the program’s window of opportunity. Without that government-backed program, GDP growth would have been slower than reported.
Second, the government’s subsidization of new home purchases also provided a boost to the recent GDP figure. The housing market appears to have righted itself. But, going forward, the question is whether it has legs. Will there be sustained recovery in housing?
Third, the success of the federal government’s stimulus package is getting partisan scrutiny. Those in the administration and their supporters aver that the government’s open checkbook approach has saved or even created hundreds of thousands of jobs. An analysis conducted by the New York Times, however, suggests that such claims are wide of the mark.
That analysis also indicates that the jobs “saved” are predominantly in the public, not private, sector. As I have written before, this is predictable: Government jobs tend to be more secure than those in the private sector. Why not use stimulus money to protect your own and expand the pro-government electoral base?
These items are not meant to say that government intervention did nothing. Quite the contrary. But it does raise an important question: When the government’s dole ends, will the economy be able to stand on its own two feet?
There are some who argue that it won’t. The Federal Reserve’s policymaking arm, the FOMC, announced earlier this month that it intends to keep short-term interest rates close to zero. This clearly reveals their outlook.
Paul Krugman, the liberal economist and columnist, continually complains that the original $787 billion stimulus package (not counting the bailouts) was insufficient. His solution is the same as many in Congress: Spend more taxpayer money, enlarge government programs and create more dependency on the government’s largess.
What evidence will be brought to bear on the question of whether this expansion is viable? Any slip in the growth of GDP will be taken as a sign to increase government intervention. This is a false premise. Economic recoveries are uneven and unpredictable. Following the bottom of the 1981–82 recession, the economy roared back, growing at nearly an 8-percent rate over the next year. In contrast, in the year following the 1990–91 recession, economic growth limped along with growth rates of less than 2 percent.
Recessions are unique in character, and this one is no different. Real economic growth may be choppy, consumer spending will rise in fits and starts, and the unemployment rate will bump up before it recedes. We must resist the temptation to use such uncertain economic signals to justify increased refutation of the economic system upon which our economic growth has been built.
Further centralizing economic decision-making with the government will have adverse, long-run effects on our productivity and well being. The economic expansion that lasted for most of the 1982–2000 era was not based on increased governmental intervention. Just the opposite. And, if one needs reminding of how well bureaucracies operate, think Fannie and Freddie, FEMA, Sarbanes-Oxley, the SEC and Bernie Madoff, and the state of our educational system, just to name a few.
Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.