How Can the Economy Recover If Bad Must Become Good?

The path to economic recovery, it would seem, requires bad to become good.

We're told consumer spending must rise. Instead, it's stagnant or dropping as consumers save more and pay down their debts. Improving balance sheets is good for consumers, because they can't spend with confidence if they're swamped in debt. When they try, we end up with a credit crisis, like the one in 2008-09. But policy makers want consumers to spend more even though it would be bad for them.

The Fed keeps lowering interest rates. The economy is growing, yet there is a good likelihood the Fed will resume buying longer term bonds after its August 10 meeting in order to rates. The effect is the same as printing money. Somehow, the concoction of dollars out of thin air is considered good even though it defies any common sense notion of value. Monetary relaxation hasn't spurred the economy because the banks aren't lending. Even though ultra low interest rates subsidize banks, they don't produce much of anything for the rest of us. Holders of capital are punished for their thrift. It's no surprise even the well-to-do are spending less. Lower rates will only discourage them more, but the Fed seems to believe that bad is good.

Conservatives want to reduce federal deficits while keeping in place the Bush 2001 tax cuts. Those are the same cuts that, along with President George W. Bush's foreign misadventures, produced the monumental deficits we have today. Why repeat Bush the Younger's errors? But conservatives think bad is good.

Liberals never see a spending bill they don't like. The most recent is a $26 billion bailout of the states that has passed the Senate and will probably pass the House next week and be signed by the President. This bill is couched as a measure to prevent more layoffs of teachers, police officers and firefighters. But money is fungible. If states didn't get this money, they wouldn't necessarily lay off more teachers, police officers and firefighters. They might make other cuts to keep important personnel on the payrolls. The $26 billion bailout allows the states to avoid facing problems of their own making. It's one thing to bailout unemployed people who were laid off through no fault of their own. Even bailing out Wall Street banks in order to save the financial system is defensible on some level. But providing a bailout to states that can raise taxes if they want to keep spending or cut their budgets, simply pushes the costs of state government political miscalculations and profligacy onto federal taxpayers. This bailout is bad, even though it's couched as good.

So, we can see that bad must become good for the economy to improve. If we can just bring ourselves to believe six impossible things before breakfast, everything will be all right.