The natural forces of recovery

Fiscal and monetary policy get all the attention these days when discussing the economy's recovery or lack thereof, but they are only a part of the recovery story.

What has driven the recovery to date is the hundreds of millions of decisions made by businesses and workers as they struggle to adjust to a reality that was not what they expected.

Businesses have cut staff in order to reduce costs. Some have relocated or shut down. Some have sold assets for a loss, thus allowing another business to redeploy those assets in a new, more profitable venture. Some have created new products; some have figured out how to make their products better or more cheaply. Some entrepreneurs have taken a risk and started a new business. Some have paid down debt, others have taken on new debt. Some have increased hiring. Some have discovered new ways of finding and producing natural gas while risking their fortunes in the process.

Workers have relocated to find a new or better job elsewhere. Many have decided to work harder or longer hours. Many have tightened their belts and cut back on their expenses. Many have decided to start their own business, or to work part-time, or to accept a pay cut. Many have learned new skills, or taken a job in a different field.

These are the things that make the economy bigger, stronger, more efficient, and more productive; that raise living standards, that create new jobs. Labor and capital need to make millions of adjustments in the wake of a recession, and in response to unexpected shocks. All that fiscal and monetary policy can do is to facilitate those decisions and those painful adjustments.

Unfortunately, fiscal policy has not been helpful in this regard. Extending unemployment benefits only delays workers' decisions to work harder or learn a new job or accept a pay cut or relocate. Transfer payments reward those who are not working while penalizing those who are; they do nothing to create new jobs. New regulations make it more difficult to start new businesses. The prospect of huge new tax burdens resulting from trillion-dollar deficits reduces the incentive for entrepreneurs to take new risks and start new companies and hire new workers. Increased government spending only saps the economy's limited resources. The uncertainty surrounding the expiration of the Bush tax cuts at the end of this year is a concern for businesses deciding what to do with their profits, and it is a concern for investors wondering whether they should take their profits now, and whether higher taxes will crush the market next year.

Monetary policy has also been a problem. With the Fed and many other central banks now navigating in the uncharted waters of massive quantitative easing, markets are consumed with uncertainty about the future value of currencies, and many investors have sought out gold and commodities for that reason. Zero interest rates have left retired people with a huge shortfall of income relative to what they had expected. A weak dollar has prompted many central banks to buy massive amounts of dollars in order to keep their currencies from appreciating against the dollar, and Treasuries are about the only dollar asset they can buy, and that in turn has contributed to depressing yields.

Lots of adjustments, and lots of problems remaining. But the net result of everything has been an economy that has been expanding, albeit slowly, for almost three years, while creating almost 4 million new jobs in the process. There's still a long ways to go before things return to normal, but we are making progress, thanks to the untold millions of difficult decisions made every day by hundreds of millions of managers, investors, workers, and consumers.

Growth is not made in Washington. Growth happens in the heartland, and it is mainly driven by people who are trying to put food on the table and create a better life for themselves and their families. This is the force that has given us a recovery, and I believe it is an enduring force; it is the unique and dynamic nature of the U.S. economy that should never be underestimated.