A political recession
Clearly the realms of politics and economics overlap, but recessions are usually framed in economic terms and solved with economic policy whether it is fiscal or monetary.
Keynesians advocate low interest rates to keep unemployment low. Low interest rates are supposed to stimulate economic growth. Keynesians believe that in the absence of consumer spending that government spending will suffice just as well, deficits be damned.
These are logical economic solutions (even if unsound), but they seem to be failing. Perhaps it is because it is not an economic problem.
We have very low interest rates, very high deficits and government spending and still we have very high unemployment. The president is jawboning banks to lend more money, but the regulators are demanding more capitalization, which restricts loanable funds.
Growth is being restricted by political uncertainty more than economic policy. Cap and Trade, the Union Card Check Bill, and the Healthcare Bill adds tremendous risks to hiring new workers. Higher taxes from several fronts have entrepreneurs frozen. In a bad business environment only the most daring would take a risk when the government will take 60% or more of your expected profit in taxes. Every increase in taxes increases the risk of investment.
But risk is more than a measure of hazard; risk is a factor of hazard PLUS outrage. We spend more to protect against terrorists than swimming pools, which claim more lives. The Union Card Check Bill concerns entrepreneurs more because of the outrage that the government proposes to intervene and dictate wages and terms of employment than because of the likelihood that a small business will face the expected problems of a union.
Some of the banks receiving TARP funds did not want it, but Paulson forced them to take it to avoid the stigma of need to those who did. The deal was changed after the fact by interference into contractual pay agreements and now the President wants to change the deal even further by selectively making banks over a certain size pay an extraordinary fee to cover the other businesses who are unable to repay TARP funds.
Who can operate a business under such conditions? Why would a $45 billion institution try to grow only to become a target of government retribution when they hit $50 billion? This is actually an incentive to shrink businesses near the tipping point. Even if the effort fails to become law or pass constitutional muster, the mere suggestion of such arbitrary punishment by the President chills the business climate.
Lack of profits is restraining this economy far more than lack of credit. Small businesses that had a wait and see attitude when the recession hit over a year ago are now starting to capitulate. These layoffs from the smallest companies do not gather the headlines; but they do show up in the unemployment surprises, such as December's 85,000 jobs lost. And these numbers are understated by the underemployed, those who dropped out of the job market, and the illegals who simply return home.
More business people who are either able or nearing retirement are "going Galt", downsizing or reducing their income and expenses, refusing to spend their labor to support a government antagonistic to their efforts. (John Galt is the industrialist hero in Ayn Rand's monumental Atlas Shrugged who disappeared into self imposed exile rather than have his business become a slave to the government.)
While the government is trying every economic stimulus in the play book, they are counteracting it with political initiatives that effectively destimulate economic and job growth with confiscation and uncertainty. A political recession requires a political solution, which would entail a reversal of every job killing bill passed or considered in 2009.
Henry Oliner blogs at rebelyid.com