The Unhappy Recovery

Economists identify our economic recovery by the positive growth rate in GDP, but this may be an unhappy recovery as unemployment may remain too high, inflation too low, and wealth concentrated too much at the top.

GDP growth reflects productivity growth and employment growth. In America’s current condition, GDP growth has remained positive because productivity has risen faster than unemployment.

Productivity gains often lead to unemployment because companies can produce more with less. But in most cases, the benefit eventually transitions into falling prices. Competition and consumer choice, especially now that information flows so freely, has led to much more competitive markets. Competitors imitate productive strategies, prices fall, and consumers ultimately benefit. Falling prices is called deflation, and that is where the economy sits today. We have seen strong enough improvements in productivity to impact both unemployment and inflation.

Some industries are effected differently than others, and those with the highest productivity growth tend to also have the most rapid price deflation and largest layoffs. We can look to the past to understanding the relationship between productivity, employment, and inflation, but as we look to the future, it is hard to imagine that productivity growth will slow down. How will we cope with the unemployment and deflation pressures that will naturally arise?

The overall inflation rate is being held up by the fiscal debt of the nation, and we are almost forced to be fiscally irresponsible for fear of deflation. Deflation is an ugly beast. It concentrates wealth by increasing the buying power of those with money, and deepening the debts of those who owe. It also reduces investment because your cash grows in value. Your investments will have to appear very strong before you will be willing to part with cash that grows by itself.

What can we do to achieve a happy recovery?

Targeting a low stable inflation rate will help to achieve a low stable unemployment rate and more broadly distributed wealth. Low stable inflation helps to maintain employment levels by encouraging investment, and to a small degree encourages the creation of new wealth by slowly discounting the existing wealth.

But we can do more!

The total percentage of people in poverty increased to 12.4 percent from 12.1 percent in 2001 and totaled 34.8 million. The adjusted poverty line figures for 2002 have yet to be released, but the poverty line in 2001 for a single person under the age of 65 was roughly $9,200 a year.

More broadly distributed wealth is morally important, but this tends not to be a compelling argument these days. Let me appeal to more base instincts:

More broadly distributed wealth leads to increased and more stable consumer spending levels, more rapid innovation and productivity growth, lower crime rates, lower dependency on social safety nets, increased levels of home ownership and real estate prices, more stable economic growth, and lower risks for equity investments and the economy overall. Falling equity risks leads to ratio expansion and rising values. This combination will make for a very happy recovery.

To achieve these worthy goals, simply eliminate federal taxes on income up to the amount earned by the lowest 20% of earners. The money could be returned annually after April 15th, once the demarcation of the 20% income level is calculated. The tax revenue impact would be negligible, but the impact on our economy would be tremendous. A more aggressive (read politically dangerous) recommendation would be to make rent payments on primary residences tax deductible, just as home mortgage interest payments already are.

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