Economic Revival: Fact or Fiction?

This article appeared in yesterday’s edition of Forbes. The authors, economists employed by First Trust Advisors, postulate that the economy is in recovery is underway. The only thing holding us back is unwarranted pessimism.

Phil Gramm’s thoughts on the economy have come back, it seems. You remember Gramm – during the 2008 election, he spouted off that the only thing wrong with the economy was the public’s perception. Shortly thereafter, Gramm joined the long unemployment line that was merely a figment of his imagination.

The indicators they point to, such as the increasing trade imbalance and devalued housing stock, are rife with the reasons the economy is in such a mess. Once again, we have economists pointing to debt-fueled consumption as the way to end the current economic slump. Nobody in their right mind is going to increase their debt load in this climate and for good reason. Basic common sense; the type of common sense missing from many economists and politicians psyches, tells us that we cannot borrow our way to prosperity any longer. Yet these types of articles continue to be published and their views continue to corrupt our discourse.

What is needed to get the economy rolling again is demand. The right type of demand, fueled by sustainable methods of production and innovation, not by gimmicks derived from debt restructuring, is the surest way to sustainable growth. So how do we get there – and remove the parasites who feed on debt?

We start by demanding government remove the binders on innovation and consumption. By continually bailing out mismanaged companies and decrepit industries, governments are preventing new industries and companies from establishing roots and flourishing. Regardless of the political unsavoriness that allowing large companies to fail and industries to wither presents, the process of “creative destruction” is essential to a growing and vibrant economy. The same way you prune dead shoots from a rose bush to allow larger blooms to grow is the same way the government should approach handling the economy.

Pursuing such a policy will cause employment displacement – but government officials can hardly claim the policy of propping up failed businesses hasn’t resulted in the same (nearly 1M newly unemployed this month can attest to that). This is where the government can assert a positive force, by providing short-term financial assistance to those displaced by the new economy. Likewise, government can fuel new growth by ensuring those displaced receive the training they need to compete.

Unfortunately, we’ve already wasted more than $1T in bailing out failed industries, leaving a huge debt sinkhole without anything to show for it. Instead of prudent financial management, it looks like our leaders – enamored with, and products of, the culture of debt – consigned the nation to a long period of economic malaise. While the second half of the program outlined above was made infeasible by the debt policies pursued by the federal government, the first half can be attained. The economic pain will not be any worse than what the nation currently feels. But given an intransigent White House and bickering Congress, it doesn’t seem likely they will change course.