Wednesday, March 28, 2012

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.


Bill said...


It looks like Europe (Spain's terrible unemployment and the threat of a new Greek govt.) is creeping back into the news. Do you think this means we'll have another "sell in May and go away" correction in the market?

McKibbinUSA said...

The US is headed downhill -- countries such as Norway have higher per capita incomes, higher life expectancies, essentially no defense spending, vast oil reserves, no teen pregancy, top scores by students, ample healthcare for all, and best of all, essentially no national debt -- someone explain to me how and why the US is the place to be in the 21st century...?

McKibbinUSA said...

PS: My point in the previous was to say that no one should be comforted by the state of affairs in the US -- status quo is not a plan for the future -- affirmation without discipline is the beginning of delusion -- sorry...

McKibbinUSA said...

PPS: Everyone should watch this video in order to understand why the future of America, and especially the American private sector, are in for hard times:

Either the US must cut spending on government employees, or US must inflate government pensions down to size -- cutting government is apparently unconsitutional (according to many in California for example) -- that leaves inflation as the only cure -- in the meantime, look for more and more large US firms to exit America...

randy said...

Dr. McKibbin:

With all respect, I like this video better:

I see in your eyes the same fear that would take the heart of me. The day may come when the courage of men fails, when we forsake our friends and break all bonds of fellowship. But IT IS NOT THIS DAY!!

McKibbinUSA said...


...said the wagon maker in 1912 -- fortunately, I am not a "wagon maker" in 2012...

Benjamin Cole said...

All sensible economists concur taxes and regs should be as light as possible. We can disagree on what "light as possible" means.

But on monetary policy, there seems to be a wide range of opinions.

Conservatives such as Milton Friedman, John Taylor, Alan Meltzer and Frederic Mishkin and Ben Bernanke have all said Japan needs to do a lot of QE. They mentioned no ethical qualms, no qualms about the soundness of currency, no qualms about spooking businesses or investors, and no qualms about igniting currency printing in other nations--indeed all full-throatedly advised Japan to print a lot more money.

Taylor, in 2006, gushed effusively about a QE program then underway in Japan.

Other conservatives today say QE is not needed--although they are somewhat mute about QE1 and QE2, which they also derided.

I sense a lot more aggressive Fed is needed. Durables weak today, house prices falling again. Man, this is too slow.

Like Friedman, Taylor or Meltzer, I have no qualms about the soundness of the US dollar if we engage in QE. Indeed, I hope for a lower exchange rate for the dollar, which so far has been helping our economy tremendously.

I do not sense businesses or investors will get spooked by QE. No one thought Japanese business or investors would get spooked.

The results of tight money in Japan have been an epic failure.

Times change, but perceptions, and especially public institutions, change very slowly if at all.

We still have the War on Poverty in the USA, and the War on Drugs, and the evidently permanent War on Terror, and USDA subsidies.

The Fed is fighting inflation.

We are fighting the last wars. Not the wars in front of us.

McKibbinUSA said...

@Benjamin, we need to accept that the Fed and ECB are indifferent to growth and unemployment, and focused instead on hammering all inflation out of the global economy -- whether we agree with that goal is not important -- what is important is that that the extant monetary policy leadership intends to do nothing meaningful to create growth or employment, and can be expected instead to impose tighter and tighter monetary controls, including capital flight laws and qualified retirement plan lifetime annuitization rules -- if we accept that this is what the Fed and regulators will do, then it becomes much easier to make money in the economy -- for example, tight monetary regimes are creating instablity in Europe that bode well for defense stocks -- also, unionized manufacturing is essentially being subsidized by governments both the US and Europe, which bodes well for the aerospace industry -- tight money regimes will also result in stronger demands for police forces and paramilitary professionals in order to quelle southern Europe style uprisings and violence in the US (and especially along the west coast) in the coming years -- all of these realities are predictable outcomes of tight monetary policies -- our personal goals need to be focused on making money and protecting our estates in order to thrive in the coming years -- the bankers running America are much more concerned with shoring up the value of Treasuries than they are on shoring up growth and employment along Main Street, which remains mired in economic depression -- now is not the time to blindly accept affirmations that can only lead to delusions -- now is the time for real politik -- dark times are descending upon America, and tight money regimes will accelerate the arrival and expand the scope of that darkness -- better to accept what is happening to grow and protect your estate based on what we know rather than what we might hope for -- Americans with means and skills are actually in a fairly good situation right now -- everyone else should be under cover...

PS: The arrrival of nationally sponsored electronic money systems is one of the topics we shoudl be talking about how to exploit to our benefit -- Sweden is now in the process of abandoning paper currencies, which means that all commerce will soon be undertaken in the electronic sphere exclusively -- the US Treasury Secretary has recently been hyping the advantages of electronic commerce regimes as well - now that's a topic worth discussing -- I urge that everyone give up on hoping for monetary expansion -- that will not occur for at least a decade from now -- better to postpone your hopes for inflation until after 2025...

PD Dennison said...


To what extent do you think that Pres. Obama and the Democrats taking control of all three branches of government lead to the recession in 2007/2008?

I sold all my stock and bought 100% treasuries (first time I ever vacated the stock market), the moment in Sept. 2008 I was convinced the Democrats would take total control.

Did the markets look forward and see what was coming, such that the economy Pres. Obama was "handed" was his own economy?

John said...

"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."

This seems like chicken little thinking to me. As long as the Republicans are led by Grover Norquist and can muster 41 votes in the Senate, there won't be any tax increases.

Also, note to PD Dennison: Obama took office on January 20, 2009. And stocks did very well the first two years of his term, that is until the Tea Party took the House in 2011.

mmanagedaccounts said...

Please----be intelligent. Stop the political jabberwocky. The Dems didn't cause the market crash in 2008 and the Tea Party wasn't the catalyst behind the market's 2011 problems.

brodero said...

The past 10 years has convinced me of the power of the business cycle.
Politicians can mess around with it
but in the end the business cycle will rule.

John said...

"Recovery" may be a misnomer. The economy is approaching a different equilibrium. For many older laid off workers, they won't work again,, unless it's part time through the lunch rush at Wendy's or something similar.

Housing prices won't recover for most Americans because wages are stagnant or falling. Unemployment will likely hover around 8 percent because of a labor surplus and advances in technology.

I hope I'm wrong about this. Corporations have a great deal of power right now and the current trend should continue: rising corporate profits and falling standards of living for most.

Jeffrey said...

Scott, fantastic post today. You absolutely nailed it.

Squire said...

Scott’s post was more like an inspirational presidential speech. I will indulge in his words for awhile.

Ed R said...

How did these "natural forces of recovery" work between October, 1929 and March, 1933?

PD Dennison said...
This comment has been removed by the author.
PD Dennison said...

If politics did not effect the economy and markets, we all would be better off for it.

But politics do matter.

Just like Argentina, Leftist politics have a negative effect in the US.