In recent economic news, there have been significant revisions that paint a concerning picture of the U.S. economy. Last Friday’s updates revealed a decline in a critical economic measure, suggesting that we may be heading towards a recession.
According to the Commerce Department, U.S. GDP grew at an annual rate of 1 percent in the second quarter, down from an initial estimate of 1.3 percent. While this uptick is better than the first quarter’s modest 0.4 percent increase, it means that economic growth for the first half of 2011 stands at only 0.7 percent. Alarmingly, year-over-year GDP has plummeted by 1.5 percent.
Historically, nine out of the last eleven recessions following World War II have come after periods of GDP growth at or below 1 percent. We may be on track to add to that statistic. It’s clear: the economy is not gaining momentum; in fact, it’s moving in the opposite direction—and many are aware of it.
The Michigan Consumer Sentiment Index, released last Friday, reflects this downturn. The index dropped eight points to 55.7 in August, from 63.7 in July, marking its lowest point since November 2008. Remarkably, the index has slipped nearly 20 points in just three months. Given that consumer spending represents 70 percent of economic growth, it is likely that GDP will continue to decline alongside consumer sentiment.
Compounding these issues are recent unemployment claims reported by the Labor Department. For the week ending August 20, jobless claims rose by 5,000, reaching a total of 417,000.
In short, the current state of the economy is troubling. What’s fueling this decline?
Factors Contributing to Economic Decline
First, while the Great Recession officially concluded in June 2009, its effects linger. Enormous government spending and Federal Reserve interventions may have temporarily boosted GDP, but these measures failed to provide lasting remedies. The stimulus did not foster genuine economic growth.
In reality, by excessively directing economic resources with vast government expenditures, policymakers hindered natural growth by reallocating funds away from productive avenues. With the stimulus now faded, the economy finds itself just as sluggish as it was prior to the intervention.
It’s important to highlight that the government does not create productive jobs; it lacks resources of its own. All its spending must come from the income generated by its citizens or be borrowed against future earnings.
Nonetheless, politicians are drawn to Keynesian economics, enjoying the control it allows them. They respond to public frustration by intervening rather than letting the market adjust to post-boom conditions.
Proposed Solutions to Stimulate the Economy
Economists are proposing various strategies, despite previous failures. Their solution? Implement more spending with taxpayer dollars, embracing Keynesian approaches once again. For instance, Nobel laureate Paul Krugman recently suggested that a massive spending initiative to combat an imaginary alien threat could rejuvenate the economy within 18 months. This quirky remark echoes previous calls for excessive fiscal stimulation.
President Obama is also preparing to unveil a new job creation initiative following Labor Day, likely focusing on infrastructure projects. This is yet another instance of advocating for increased spending in hopes of economic recovery.
However, history indicates that such stimulus measures often provide only a temporary lift before the economy falters again—leading to increased public debt in the process.
If politicians genuinely wanted to foster economic improvement, they would abandon their elaborate plans. Instead, they could cease government-induced stimulus, allowing market forces to allocate resources effectively. Reducing regulatory burdens, cutting taxes, and permitting productive citizens to thrive would lead to authentic job creation.
Achieving this, however, requires the political courage and wisdom that have been noticeably absent in Washington for decades. In the past, figures like Calvin Coolidge successfully decreased taxes and spending, resulting in annual economic growth of approximately 7 percent during his tenure. Additionally, they managed to reduce national debt by 25 percent through surplus generated from lower taxes and limited government intervention.
In conclusion, the U.S. economy is at a crossroads, facing a possible recession marked by stagnating growth and dwindling consumer confidence. Politicians need to reconsider their approaches if genuine recovery is to be achieved.
Sincerely,
MN Gordon
for Economic Prism
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