Thursday, October 14, 2010

Credit default swap spreads point to improvement

After jumping in May in the wake of the concern over a European credit crisis and expectations of a double-dip recession, CDS spreads have settled back down and are now only modestly higher than their lows early this year. I think this shows that financial markets are healthy and liquid, and there has been no deterioration in the economic fundamentals so far this year. The problem, of course, is what appears to be a reluctance of businesses to invest in new jobs and productivity enhancements.

Supply-siders like me keep insisting that the problem with slow growth can be traced to a lack of "supply; the economy can't grow if our productive capacity doesn't grow and if new jobs aren't created. Demand-siders (aka Keynesians) keep insisting that the problem is a lack of "aggregate demand;" if only everyone would spend a little more then we would be back on the road to recovery. It's a chicken-and-egg argument that to my mind is very simple to resolve using simple logic: you must first produce more before you can spend more. The supply-side solution to today's sluggish economy is to increase the incentives to work, save, and invest, while lowering the barriers to working more and investing (e.g., regulatory burdens, reducing the threat of higher taxes, and generally increasing confidence in the future). That is precisely the opposite of what Obama and the Democrats did early last year, and that's why the economy has, predictably, been very slow to recover.

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