Tuesday, September 21, 2010

The recession is over?

The recession was over in June of 2009. That is one way of putting it. More accurately, one would say that Gross Domestic Product, or GDP, which was in a free-fall, bottomed out around June 2009 and began rising again. But we are not yet out of the recession.

The recession, in my opinion, is not "over" until we reach both GDP and employment levels of 2007. We are not there yet. If the government would get out of the way, the recovery would be faster.

Randall Hoven, who in April called the "end" of the recession as June 2009, has this to say about the current situation:

There are two hypotheses, at least. One hypothesis is the standard story of the government-as-savior crowd. TARP and other bailouts fixed the financial crisis and Obama's stimulus stopped the economic recession that resulted. Without either one, things would have been worse, much worse.

Here is another hypothesis. We had a recession, just like the other 10 times since World War II. As in every other such case, this recession would have ended in about a year if government had done nothing in particular. But this time, the extra costs and uncertainties caused by government "fixes" in fact prolonged and deepened this recession and threatened a double-dip or stalling out of economic activity.

Neither hypothesis can be "proved," since all we know is what government did and what happened. We do not know what might have happened had we done something else.

But here is my take. The times we let government do the most to "fix" a recession, meaning the Great Depression and our current Great Recession, were the very times the economy did the worst. When government let things more or less alone, the economy recovered fairly quickly and with minimal damage.

We also have the academic studies by, of all people, Christina Romer, Obama's initial chair of the Council of Economic Advisers, that say fiscal policies (e.g. government spending or "stimuli") did not get us out of the Great Depression or any of our post-war recessions.

The analogy is bleeding a patient. If the doctors bleed a patient and he gets better, they take credit. If the patient gets worse, the doctors say he was not bled enough.

Paul Krugman is the quintessential Dr. James Craik of our day. Krugman seriously believes that Japan's problem was that it was not bled enough! Enough stimuli to cause a debt of 200% of GDP, highest in the developed world, resulting in two decades of near non-existent growth, and Krugman still says more bleeding needed. (Do facts ever matter to these guys?)

I think, at this point, we have enough evidence for both bleeding as a medical cure and fiscal stimulus as an economic cure that we can stop killing patients by bleeding them to death.
Government needs to get out of the way. Government can't manage the economy, a fact proven by history over and over again.

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