An Unusual Economy? (Thomas Sowell)

Creators Syndicate ^ | August 30, 2011 | Thomas Sowell

[jazusamo]

Many in the media are saying how unusual it is for our economy to be so sluggish for so long, after we have officially emerged from a recession. In a sense, they are right. But, in another sense, they are profoundly wrong. The American economy usually rebounds a lot faster than it is doing today. After a recession passes, consumers usually increase their spending. And when businesses see demand picking up, they usually start hiring workers to produce the additional output required to meet that demand. Some very sharp downturns in the American economy, such as in the early 1920s, were followed quickly by bouncing back to normal levels or beyond. The government did nothing — and it worked. In that sense, this is an unusual recovery in how long it is taking and in how slowly the economy is growing — while the government is doing virtually everything imaginable. Government intervention may look good to the media but its actual track record — both today and in the 1930s — is far worse than the track record of letting the economy recover on its own. Americans today are alarmed that unemployment has stayed around 9 percent for so long. But such unemployment rates have been common for years in Western European welfare states that have followed policies similar to policies being followed currently by the Obama administration. Those European welfare states have not only used the taxpayers' money to hand out "free" benefits to particular groups, they have mandated that employers do the same. Faced with higher labor costs, employers have hired less labor. The vast uncertainties created by ObamaCare create a special problem. If employers knew that ObamaCare would add $1,000 to their costs of hiring an employee, then they could simply reduce the salaries they offer by $1,000 and start hiring. But, since it will take years to create all the regulations required to carry out ObamaCare, employers today don't know whether the ObamaCare costs that will hit them down the road will be $500 per employee or $5,000 per employee. Even businesses that have record amounts of cash on hand are reluctant to gamble it by expanding their hiring under these conditions. Many businesses work their existing employees overtime or hire temporary workers, rather than get stuck with unknown and unknowable costs for expanding their permanent work force. As unusual as 9 percent unemployment rates may seem to the current generation of Americans, unemployment rates stayed in double digits for months and years on end during the 1930s. Franklin D. Roosevelt's administration followed policies very similar to those of the Obama administration today. He also got away with it politically by blaming his predecessor.

[Carry_Okie]

It's what happens when you print enough money to replace labor with capital, then export the capital so that you can print MORE!

[Buckeye McFrog]

it’s the OBAMACARE, stupid!

[Dick Bachert]

[EVO X]

I agree. I'm 55 and I don't plan on making any more major purchases in the foreseeable future.

Ditto that. I am of similar age. I am probably about 2 years behind schedule where I would like to be with retirement. So it is save more, spend less. My lifestyle hasn't changed drastically, but I do a little bit less of everything..

[Ghost of Philip Marlowe]

Which, of course, indicates that those in power are the dumbest bricks in the pile or that they know they are causing damage and that they are following a destructive course of action knowingly and willingly.

[Ghost of Philip Marlowe]

An interesting aside...in the period of the 1920’s through the 1940’s when socialism was really starting to get some traction, one of the big arguments they used to implement central management was that the free-market system (those eeevil capitalists) created an inherently unstable and unpredictable economic environment.

Their argument was that central management would eliminate that unpredictability and create an environment of expectations that could be relied upon.

History has proved that the greater the power of the central managers and the more they try to manage the more frequent the swings in all aspects of the economy and the more wild the swings.

Some would try to explain this as complicated, but it is actually quite simple.

When a handful of people try to dictate to millions what employment there will be, how much it will pay, how much manufacturing can produce, how much they can sell their goods and services for, they are trying to push with a rope. One little snag anywhere along that rope and it binds.

By allowing the market to drive the economy, millions of people pull the economy rope along, when there is a snag, legions jump in to fix that snag and keep the economy towing along.

[10thAmendmentGuy]

Which, of course, indicates that those in power are the dumbest bricks in the pile or that they know they are causing damage and that they are following a destructive course of action knowingly and willingly.

I don't think that's the entire explanation, however. Let's be honest with ourselves and admit that a majority of Americans are stupid, and that they don't have a clue how the economy works. They don't understand that the economy is actually US, and that central planning or targeted tax cuts or any other load of B.S. won't do a darned thing to help the economy. Americans see the economy as it stands right now and demand ACTION from politicians. Politicians who advocate letting the market correct itself and go through the full process of deleveraging will be savaged. Americans are wimps. They decry socialism while stating that they have an entitlement to receive 3x as much in Medicare benefits as they ever paid in. Medicare is socialism, and it is a failed system. When polled, Americans say that the rich should pay more in taxes. Okay, but they also state that no one should pay more than 15% of their income in taxes. See the problem here? The only conclusion we can draw from this manifestation of cognitive dissonance is that Americans are stupid, and they don't really know what they want. That's why they're so susceptible to being TOLD what they want by opportunistic politicians.

[Ghost of Philip Marlowe]

I’ve studied far too much regarding the history of collectivism from the mid 19th century to the present not to think that this is all deliberate and part of a master plan toward an end goal of globalized socialism.

[gogogodzilla]

Yes... that's true, you will be spending less. That money you are socking away, however, will be put right back into the economy in the form of loans (if your money is in a bank) or spent by businesses (if it's in stocks).

So, your money isn't being pulled out of the economy... unless the government is creating so much uncertainty in the market that banks and businesses refuse to do anything with your money.

Oh, wait...

:-P

[okie01]

Doing nothing would be far preferable to what Obama is doing or what the Republicans are proposing. Just leave the economy alone and it will get better.

Unfortunately, Democrats (and Obama) are congenitally incapable of leaving the economy alone.

[gogogodzilla]

I dunno, a command economy could be simple and successful!

Rule #1: Anyone with money (personal or loaned) can open a business.
Rule #2: Business must sell their good/service at prices that net an overall profit.
Rule #3: If demand increases, supply will increase (either by increasing capabilities of existing business, or because new businesses will spring up to meet the gap).
Rule #4: see Rule #3, now flip it to the negative side (ie: if demand decreases...)

See, simple!

:-P

[wastoute]

Ministry of Truth.

[wastoute]

Re-read that essay “I, pencil”. Realize not one of these “central planners” knows how to make a pencil.

[mc5cents]

Sowell’s analysis is spot on but incomplete.

Of necessity. This is his column which is limited to certain space. He has written extensively on economic matters with many books filled with analysis including "contraction".

[Ghost of Philip Marlowe]

It’s worse than that.

These central planners loathe not only the production of “the pencil,” but also loathe that the people want and use “the pencil.”

Their real end-goal is to determine what the people should have and to direct who shall be the producers and distributors of that limited set of goods and services (to each according to his needs, from each according to his abilities).

That they fail in the production and distribution of “the pencil” is secondary to their goal of obtaining control over the manufacture, distribution, ownership, and usage of “the pencil.”

[allmendream]

In a socialist/communist system it is inevitable that you will end up ‘feeding bread to pigs’.

The ‘Revolution’ promised “bread and freedom”, they were not too forthcoming with the freedom - so they figured they could at least give out bread.

Bread was cheaper than the grain that went into it. So farmers fed their pigs bread.

Now the pig doesn't care that you ground up the wheat and wasted fuel cooking it, or that you mixed in finer ingredients - they grow just as fat on wheat.

With a “command” economy it is inevitable that such discrepancies will happen - and that people will take advantage of them. And you end up ‘feeding bread to pigs’.

[conservatism_IS_compassion]

“He also got away with it politically by blaming his predecessor.”

Until he was able to get us into WWII, after promising that he would not.

The Depression ended when Roosevelt’s heart stopped beating. He was our version of a leftist dictator. Only the Constitution and the Supreme Court kept us from going completely totalitarian.

Roosevelt had many people so brainwashed, there were soldiers/Marines who, upon hearing of his death, said sorrowfully, "Now the war will never end."

He had people thinking inside the box, big time.

[jazusamo]

Roosevelt had many people so brainwashed, there were soldiers/Marines who, upon hearing of his death, said sorrowfully, "Now the war will never end."

My FIL fought in the US Army until the end of the war in Europe. He became an LEO and retired after many years service and was a conservative in almost every fiber of his being.

We were talking one evening and the subject of FDR came up, he worshiped FDR and I was astounded, I would never have believed it if I hadn't heard it from him. I didn't argue the issue because he was a great guy and I believe him going through the depression and his Dad losing most everything he had had a lot to do with it.

[neverdem]

Sowell’s analysis is spot on but incomplete. The best economic analysts I’ve been reading have made the point that this isn’t a standard 20th century “recession”, nor is it really like the Depression, although it feels that way. Rather, this more favorably compares to a 19th century “contraction” which occurred for 16 years in the late 1880’s. By Contraction is meant that the economy is in fact shrinking; thus for example, we’re seeing far lower employment rates expressed as a percentage of eligible working population holding jobs. That rate is down to something like 63%. Typically it runs in the high 80’s. At the same time, we’re seeing a serious “wealth” contraction with something like 1/3 of the residential real estate market under water with no hope for recovery. Housing hasn’t really ever bottomed out.

I “think” (meaning I’m not sure) the problem may well be twofold, 1) too many are being paid far too much to not work and 2) horrible trade policy has incentivized the offshoring of jobs.

There being little in the way of political talent in the offing, I don’t expect any speedy resolution to this mess. For all practical purposes, this is the “new normal”.

Rich21IE, you're very close. Even Obama' representatives have said that recessions due to financial crises take very long to resolve. IIRC, the average is about 7 years. Bank closures and bank holidays were very common during the Great Depression. The cause was bad debt just like the subprime mess and housing bubble caused this great recession.

Obama took a bad situation and is making it worse with Keynesian deficit spending and more regulations! Add in expensive energy and food. We're going nowhere fast.

[conservatism_IS_compassion]

Roosevelt had many people so brainwashed, there were soldiers/Marines who, upon hearing of his death, said sorrowfully, "Now the war will never end."

My FIL fought in the US Army until the end of the war in Europe. He became an LEO and retired after many years service and was a conservative in almost every fiber of his being.

We were talking one evening and the subject of FDR came up, he worshiped FDR and I was astounded, I would never have believed it if I hadn't heard it from him. I didn't argue the issue because he was a great guy and I believe him going through the depression and his Dad losing most everything he had had a lot to do with it.

Once they swallowed the idea that FDR was doing things for the people, and anything in opposition to FDR was against the people, they were irredeemable.