We Need to Fight Governments That 'Fight' Recessions

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One recent Friday, my wife and I decided to revisit “The Sixth Sense.”  One of the notable parts that had slipped my mind was Dr. Crowe and Cole’s visit to the wake of Kyra, one of the dead people Cole “sees.”  Afterlife-Kyra gave Cole a videotape showing her mother “keeping her sick” by spiking her meals with what appeared to be cleaning solution.  Most folks characterized Mrs. Collins’ actions as symptomatic of Munchausen Syndrome by Proxy.

In an ironic twist, the next day I opened my mailbox to a story in The Economist suggesting ways the U.S. can “fight the next” recession.  While Kyra’s mom probably knew that what she was doing was potentially lethal, the same isn’t totally clear about politicians who regularly pass legislation to “fight” economic slowdowns. 

Then again, given that Munchausen is defined as an “attention-seeking behavior by a caregiver through those who are in their care,” perhaps it’s not much of a stretch after all. 

Most candidates run for public office on pledges to “do something,” one of the easiest ways being to “help” people when the economy goes south. 

As the internet boom of the 1990s started fizzling out, Election 2000 was revving up.  In his presidential campaign, George W. Bush proposed a $1.6 trillion income tax cut.  Upon passage, not only were rates lowered, but in an effort to gird against a “slowing economy,” checks for $300 and $600 were sent to single and married taxpayers, respectively.

Seven years later, as the rot of subprime mortgages started eating away at the economy, President Bush signed the Economic Stimulus Act, which doubled the size of the checks from 2001.  The Economist cites this in comparison to a proposal by Claudia Sahm of the Federal Reserve. 

The problem with this idea is that it is unlikely to serve politicians’ intended purpose of sufficiently mitigating the “downward spiral of consumer spending.”  When the preponderance of news points to a slowing economy, people naturally retrench.  Big purchases are delayed.  Vacations turn into staycations.  Restaurant dining is curtailed.  Cash is conserved.   

Sure enough, by the time the government decided to send checks to citizens, fiscal religion had already set in.  Studies showed that only one-fifth to one-third of recipients spent or intended to spend the windfall, such as it was.  The rest saved or paid down debt. 

This was a testament to the instinct of people who are regularly prodded to spend, Spend, SPEND!  Moreover, it’s not a reach to say the profligate example set by the federal government (currently over $22 TRILLION in debt) serves to normalize the precarious financial situation many folks themselves in in.

According to LendingTree.com’s ValuePenguin, over 40% of American households “carry” an average balance of over $9,000 on credit cards.  Conversely, we keep under the same in savings, hardly enough to cover a few months’ worth of expenses in case of an emergency, like losing a job.  Whether or not The Economist intended, this comprises part of what it claims as “gaps in America’s economic defence.”

Nevertheless, what they suggest is a bolstering of “automatic stabilizers”: unemployment insurance, Medicaid, food stamps (SNAP) and the like.  These existing public benefits programs kick into action immediately when the business cycle goes south. 

One is compelled to ask though, do we really need to further disincentivize individuals from practicing prudent financial habits?  How much more dependence upon the state do we want to foster?  Why would we want to encourage people to spend more by redistributing taxpayer-funded “cash straight into their wallets?” 

While it’s true that consumer expenditures constitute more than two-thirds of gross domestic product (GDP), it is mistaken to say that it “fuels … economic output.”  Consumption is the final step in the process, literally destroying the value made possible by that which is also the best protection from downturns; personal savings.

When we save, we make available potential capital that can either be invested in the operations of an existing business, or fund someone’s idea for a new product or service.  This is where genuine output is born, and prosperity starts.

We have to first take responsibility for our own financial well-being, and pull the government needle out of our arm.  We can’t rely on an entity that has arguably done more to contribute to inflated costs of living than anything else.  Further feeding the beast merely helps the state paper overits past transgressions.

In December 2000, with the fate of the presidential election hanging by a chad, Bush’s vice-presidential running mate Dick Cheney was derided for speculating that the U.S. was on the “front edge of a recession.”  While no one with financially-sound habits would ascribe too much wisdom to someone who once proclaimed that “deficits don’t matter” (Modern Monetary Theorists, anyone?), he was on to something.

Recessions are not something to be “fought.”  They are a natural phenomenon, the part of the business cycle when labor, investors and management step back, take a deep breath, and reassess how resources are being used.  It is during this phase when the seeds of recovery are planted. 

When we depend on state-administered recession medicine, intended to encourage buying more stuff, we throw a wet blanket on our ability to recover and prosper.  Instead, we end up slogging along, growing below our potential, if at all.  See the Great Recession.

If we need to “fight” anything, it’s complacency and a government that sets out all manner of impediments that dissuade us from taking care of ourselves.  To be sure, the U.S. economy is more resilient than a little girl in a movie being poisoned by her mother, but it begs the question; why empower overly eager “caregivers” to poison us at all? 

Christopher E. Baecker manages fixed assets for Pioneer Energy Services and is an adjunct lecturer of economics at Northwest Vista College in San Antonio. He can be reached at professormetal@chrisbaecker.com, or on Facebook, Twitter, and LinkedIn.

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