Evans On The Economy -- Don't Look To Corporate Crooks For A Remedy

Dec. 21, 2004
Patience, not paybacks, is needed in this sluggish recovery.

There have been six U.S. recessions since 1970. In four, the economy got off to a slow start, the exceptions being the recoveries of 1975 and 1983. The Fed tried to jump-start the recovery in mid-1980, but it lasted only a year. In the other three recoveries, the economy stagnated for several quarters until stimulatory monetary and fiscal policy came to the rescue. This time, the Fed cannot cut the funds rate much below its current level of 1.75% -- and Congress is not about to pass another big tax cut. In fact, many Democratic politicians want to reverse the cuts that were put on the books last year. In many respects the government fought the recession the right way. The Fed cut the funds rate from 6.5% to 1.75%, and fiscal policy stimulated the economy through a substantial tax cut and pumped at least an additional $50 billion directly into the economy. Yet the recovery is almost stillborn, with anemic 1.1% growth in the second quarter -- a figure that could very easily be revised to zero or negative in the coming months. The reason isn't much of a mystery. You can't expect the S&P 500 to fall 50% and the Nasdaq to fall 75% without having some negative impact. It's easy enough to be furious with those crooks who looted the corporate piggy banks to pay for their own hedonism, and prison is too good for many of these scum. But that isn't really the point. From a macroeconomic viewpoint, what happened? They took money that wasn't their own and spent it. That actually created quite a few jobs -- for a while. But where did they get the money? Unlike the Federal government, they couldn't print it directly. They robbed people of their retirement income and medical benefits. Since that wasn't obvious at the time, consumers kept spending. Now these same people are going to have to cut back on their future spending. Others will go back to work at minimum wages. They'll be able to pay for food and medicine -- well, at least for food -- but they won't be spending much on discretionary items. When we talk about the maldistribution of income, the idea is usually that the rich get too much, and the poor get too little. But unless the rich take the money and bury it in the back yard, the money gets spent on something, and that creates jobs. Even if it is spent overseas, the world is on a de facto dollar standard, so it comes back to these shores. If they don't spend it, they invest it, boosting the stock market and creating more jobs. At least for a while. But this maldistribution of income is unique in the sense that it is a switch between spending more now and spending less later. All those phony-baloney statistics about the new economy and record growth rates in productivity -- which, by the way, are being revised down by government statisticians -- simply covered up the fact that the rich were spending tomorrow's income. Now we will pay the price. Some have suggested that we make the miscreants give it back. Even if all those ill-gotten gains could be recovered, we are talking maybe $500 billion. Nice try, but about $5 trillion vanished in the recent stock market slide. It shouldn't be that difficult to make it mandatory that when a company agrees to set aside employees' money for pension and retirement benefits, that money is put into a very safe investment far away from any money-grubbing crooks. But that's for the long run. How about now? There aren't any easy answers. If the government simply opens the faucets, the dollar will depreciate again, and 20 years of hard-earned gains will be thrown out the window. If Congress takes punitive measures even against corporate executives who did nothing wrong, productivity growth will be stymied, unemployment will rise further, the stock market recovery will be stunted and everyone -- except a few lawyers -- will be worse off. So the only answer is: It will take time. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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