What Does the Road to Recovery Involve?

It seems clear now that monetary policy isn’t able to shake the economy out of recession. Fiscal policy, on the other hand, probably could.  Monetary policy, the province of the Federal Reserve, primarily stimulates a flagging economy by driving interest rates down. This entices businesses and individuals to borrow funds to invest in expanding their operations, thus creating more employment opportunities. The more the ranks of the employed expand, the greater the amount of consumer spending, which in turn greens the economy. Unfortunately, interest rates are at historic lows (0-.25%) yet the economy is not in a recovery mode.

The Fed has other monetary tricks, such as its open market activities, but these have made very little difference so far.

Fiscal policy is controlled by the Congress and takes the form of raising or lowering federal spending and/or taxes. Here’s the dilemma. The administration, with the Democrat-controlled Congress, certainly has raised spending to unheard of levels, but failed to aim those dollars at targets that would directly and positively impact the economy. This in turn has caused a great deal of concern over the negative impact the burgeoning debt ultimately will have on the economy.

In addition, until very recently the administration and Congress have been clear in the intention to raise taxes in a variety of ways: let the Bush tax cuts lapse; raise taxes on certain individuals and businesses; impose a value-added or VAT tax; etc.

The record-breaking debt, out-of-control spending, and imminent tax burdens have created acute uncertainty about the future of the economy and the well being of the businesses and individuals in it. This is an anti-recovery recipe and exactly opposite of what the government should be doing to stimulate confidence: slashing spending, shrinking government, and lowering taxes. The individual consumer is conserving cash out of a sense of fear of the unknown. U.S. businesses are sitting on almost $2 trillion in cash because of this curtain of uncertainty hanging over the economy. Turned loose, this is quite sufficient to stimulate a strong upward surge in the U.S. and global economies.

For an interesting review of the three most likely economic scenarios, read the Wall Street Journal at the link provided.