Published: July 01, 2008 10:07 am            

Fixes could be worse than recession

Headlines caution us that the American economy is headed for, or perhaps is already in, a recession. Implicit in these news stories is an assumption that it is the government’s responsibility to prevent the recession from happening. To the contrary, expecting a recession-proof economy is unrealistic. Furthermore, much of the proposed governmental actions will either have no impact on the economy or even be harmful to it.

If you add together the value of all the goods and services produced in America over a certain period of time, it is called the Gross Domestic Product, or GDP. When the GDP goes up, life is good. Because the economy is expanding, it is easier for businesses to find customers to sell to, and there is more opportunity for employees to find companies to work for. On the other hand, when the GDP goes down, it means the economy is contracting so profits decrease and it is harder to find work.

GDP is typically measured on a quarterly basis. According to the technical definition, if the GDP decreases two quarters in a row, we are in a recession.

The American economy is driven by a multitude of factors: new inventions, natural disasters, government policies, but mostly by the countless decisions made and activities performed by the 300 million of us every day. Most of the time, all these interactions lead to a rising GDP, but every few years the economy slows, in effect to catch its breath and adjust to a changing marketplace.

This is no consolation to those out of work, but recessions come and go in cycles. Some recessions last longer than others and the time between recessions can vary, but we’ve always had recession cycles in the past and we will continue to have them in the future.

Nevertheless, politicians don’t get elected by saying to the unemployed, “You’ll have to wait this one out.” The tendency is for our public officials to do something, whether those actions will have a positive effect on the economy or not. The government has two main tools in its arsenal whenever GDP stagnates: fiscal policy and monetary policy.

Fiscal policy is performed by Congress through its expenditure of public tax dollars. Earlier this year, Congress passed and President Bush signed a $168 billion economic stimulus bill which gave $600 to most taxpayers, plus $300 per child. The intent is that recipients will spend the money and help jumpstart the economy.

Here’s the catch ... most Americans have indicated in polls that they plan to use their stimulus check to pay off existing bills or put the money in savings, things which won’t increase GDP at all. Yet, the stimulus will add to the national debt our children will owe. (Now had Congress simultaneously reduced spending by $168 billion, I’d be all for the stimulus.)

Monetary policy is within the domain of the Federal Reserve. Through its setting of interest rates and other measures, it can increase or reduce the supply of money in the banking system. When there is the threat of inflation, the Fed tightens the money supply. When there is the threat of recession, the Fed loosens the money supply.

In my opinion, the Federal Reserve has more power than Congress to limit the severity of recessions. My problem with monetary policy of late is that the Fed’s actions are presented as an attempt to influence consumer behavior. That’s like the tail wagging the dog. The Fed’s job should be to react to the economic activity, not the other way around.

One could reasonably argue that the government should play an active role in addressing the current economic downturn since they were complicit in causing it. The credit crunch resulting from record numbers of mortgage foreclosures did not happen in a vacuum. Federal programs have lowered the down payment necessary to buy a home. Government has also strong-armed lenders into making home loans to those with bad credit. The predictable outcome has been many new homebuyers who can’t afford their monthly payments.

My preference, of course, would be for the government to stop manipulating the economy in the first place.

— Peter Miller is chairman of the Hendricks County Republican Party.

        

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