Economics

In today’s economic environment, helping small businesses create new jobs needs to be our leading priority. Yes, we must take care of the displaced, but we must do it through job creation. The Democrats in Concord can’t seem to understand this.  They keep adding more and more weight onto the state’s business community, expecting them to continue to fly. They have just done it again this week by adding more social safety net legislation at the expense of job creation. While they will now crow about “helping people” their policies will have the exact opposite impact.

America’s economic safety net undoubtedly plays an important role in stabilizing the economy when events or economic situations take a turn for the worse. Markets have always had an unfortunate tendency to over-react in the short run. Therefore, such measures as unemployment insurance serve as a good short term shock absorber to slow the descent while economic policies and normal market forces bring the economy back into balance. Other social safety net policies can also be helpful to an economy and the quality of life.

But as the saying goes, “Taken to an extreme, any virtue can be turned into a vice.” Just as a wrong sized shock absorber on a car can be counter productive, so it is in economics. The Europeans have been seeing this in spades over the last few decades. Several countries like France and Germany have adopted such inflated unemployment and other social benefits that businesses are now very reluctant to hire new people. As a result, unemployment is the overriding problem because existing businesses can’t bear the load. This also means that new businesses are hard to start and job creating innovation is much slower than in the faster paced economies. There is clearly a balance to be struck.

America’s business community is now struggling to survive in the worst economic downturn in the past seventy years. Even the largest and once most successful of businesses are holding on by their fingernails. In the past year we have seen the bankruptcy of some of America’s business icons such as Chrysler and General Motors, Merrill Lynch, Circuit City, and many others. At the same time businesses have been scaling back and closing stores at an alarming pace. As a result, the country’s jobless rate jumped to 9.4 percent in May, the highest in twenty-five years. This figure is already higher than the “worse case scenario” of the government’s just completed stress tests. And there is more to come as unemployment will surely pass into the double digits.

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Inflation dangers ahead?

Washington keeps looking for quick and easy ways to get the economy back on its feet and return us back to the good old days. Some Americans think we can shop our way back to happiness. At least that’s what Washington would have us believe. As such, our national government is now spending like never before, forgetting that we are running up our collective credit cards to the limit and that the tab will ultimately have to be paid. But never mind they say, it feels good for now – and some would have us believe we need all this “stuff” are buying.

Between the U.S. Treasury and the Federal Reserve, Washington has committed well over $12.8 Trillion in new spending. The Europeans warned President Obama during this last round of G20 meetings that this is a dangerous course to take. The head of the European Union, which is always worried about inflation, w arned that the spending of the U.S. Government is taking us down “the road to hell.”  The French and the Germans have made similar warnings and have pressed for a repair to the regulatory system. Unfortunately, the Democratic Administration has brushed past these requests. While acknowledging that their arguments have merit, the Democrats called for even more stimulus spending.

One of the dangers of all this historically unprecedented spending is that it will spark a very dangerous new round of inflation. Never mind the spenders argue, before inflation can get started, we will pull the money out of the system. This of course sounds very much like the drug user who says that he is not hooked and can quit anytime. Washington does not work that way and never has; real spending cuts have rarely been seen. A brief history of the size of government as a percent of GDP shows that government never shrinks. At best, it plateaus from time to time.

Were this a run of the mill recession, where there was a mere imbalance in asset supply and demand, government spending might do the trick. But this is a deeper financial sector crisis that will require major structural changes.  No amount of spending will fix the structural problems in the economy. We may very well pump up the economy into a short term sugar high. But there is an underlying illness that very much needs tending, lest we set ourselves up for a repeat of 2008. In some w ays, the experience of the crash of Long Term Capital Management (LTCM) in 1998 was, in effect, a dress rehearsal for this crisis – from which we learned nothing.

First and foremost,…

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