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Let the recession run its course

Posted by David A. Peterson on 9. January 2009 in Economics |

President-elect Obama has put together his economic team in the past few weeks. Both Republicans and Democrats were pleasantly surprised at the distinguished list of candidates that have been proposed. All very experienced, you might not like their previous political views but it is a team that should hit the ground running.

 

What a lot of us are worried about is just exactly what will they be doing when they hit that ground. Yesterday President-elect Obama began to sell his economic stimulus package. I was working out at the gym and at least 6 of the 12 televisions above my head were reporting his package without any commercial interruptions.

 

What struck me at that moment was that the President-elect was trying to sell the American public on his massive stimulus package. You have to wonder why you would need to “sell” this package. If the economy is in such a mess shouldn’t it be obvious to everyone that the stimulus package is needed?

 

I realized that even though he was on just about every cable channel and all of the networks he wasn’t trying to sell the American public. He was trying to sell the Legislative branch of our government. Specifically he was trying to sell his own party in Congress. 

 

Democrats and Republicans are aghast at the shear size of this economic stimulus package. $800,000,000,000 is a whole lot of money. That is on top of our current federal budget deficit.

 

If the situation was as dire as it appeared in October 2008 then you could make a case for another stimulus package. Some amount of deficit spending is probably needed to spur the economy forward.

 

This issue at this time is the shear size of the package. In case anyone hasn’t notice the crisis has just about run its course. I agree this past fall was a very scary period of time. I was glued to the economic action almost 24/7. I figure last year we lost 1/12th of our total yearly economic activity due to the credit crisis. It probably wasn’t that bad but I bet it was close. However now we are in a normal recession. It may be severe but it is a recession.

 

Recessions have to run their own course. Governments are not big enough to actually drive the economy for more than a short period of time. There just isn’t enough government related activity that is truly needed to bring the country back to full employment. Bridges need to repaired and roads need to be built but after that – what? Build senior citizen centers? Parks? New City Halls?

 

That type of massive building was tried for 10 straight years during the great depression. To be truthful FDR did employ millions of people but almost 70 years later most economists are still debating if all of that activity was good for the economoy or was it at the expense of the private sector. It is well known now that all of that building did nothing to relieve the overall unemployment of the era.

 

It appears to me that the legislative branch is looking in the rear view mirror. They have to be thinking… “If we spend all of this money will it actually help or hurt the economy in the long run?” Will we still be looking at 7% unemployment or higher if we spend all of that money?

 

If the economy was still spiraling out of control then the answer may be a little simpler. But the economy is starting to stabilize. Unemployment is rising and will continue to rise for the next 6 months but that is to be expected and that will happen regardless of what Washington spends over the next few months.

 

The clearest sign that the economy has stabilized is the stabilization of the stock, and commodity markets. I agree that the stock and commodity markets are at severely depressed prices as compared to last year, but they have stabilized and since they are future gazing markets you have to trust their judgment that the worst of the crisis is over.

 

If the economy has stabilized then you/we/our elected officials have to let the recession happen. Companies have to constrict to regain their original footing. Companies have to get back to their basic business models.

 

If government wants to help then they need to help business find their footing not compete with them for resources. Isn’t that the great lesson of the great depression of FDR’s era. Government was hateful, harsh, and hampered the general business community.

 

What will $800 billion do to our economy? That is why President-elect Obama is having to sell his package to the legislative branch. He doesn’t know what it will do, he is already expecting trillion dollar deficits in the future. Those deficits will be competing with the business community’s need for resources.

 

Here’s my advice – stop selling stimulus packages and find ways to make businesses prosper. The government cannot employ the vast amount of  America workers. It will need the business community to do that for them.

 

The business community will need the recession to run its’ course. Don’t try to stop it, you can shoot for a softer landing, but don’t try to stop what must be done. The recession must continue for the next few months, President-elect Obama just has to accept that as a fact.

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