An Uncertain Recovery

We are clearly in a recovery and many are using it to claim a victory on this administration's economic policies. I remain skeptical.

This recovery comes on the heels of a serious drop in production.  Once we realized that we were not going into to full force Armageddon, the stock market recovered and GDP followed.  But the recovery ran into the headwinds of a political recession.

This recovery so far is substantially weaker than after the similar recession of 1981 when unemployment also went over 10%. That recession ended with a policy of reducing interest rates, reducing taxes and  reducing regulations.

Whereas Volcker and Reagan successfully fought to reduce inflation, we are facing an increase in inflation.  The Fed claims that it can remove the trillions in liquidity it injected into the market at the proper time to avoid sending this fragile economy back into recession; the dreaded double dip.  I seriously question whether we have either the capability or the political will to pull this off. 

With interest rates so low today, they can only go up. We face dramatically increased regulation and substantially higher taxes. We also face deficits far greater than anything seen before.

Wages have been driven down and companies are benefitting as a result , but the growth in GDP is not being spent on capital investment. A far greater proportion is being spent just to replenish inventories. The political uncertainty and higher taxes just make a long term capital investment too risky.  Strong bank earnings are coming from short term investments and trading, not long term commitments.

Extended unemployment benefits are a direct incentive not to work.  If the unemployment remains high, how many times will these benefits be extended? 

If we are showing signs of growth and only one fourth of the stimulus package has been spent then why do we need to spend the rest of it?  As the stimulus finds make their way through state bureaucracies to their final projects we may still see some benefit and further drop in unemployment, but most of these stimulus projects were not for infrastructure development, and by definition ‘stimulus' funds end.

Before we claim victory we need to see this economic cycle complete itself . We have had recessions before and we ended them with far less radical policy than we are being subjected to than with this recovery.  We are combining political policies antithetical to economic growth with a strongly simulative monetary policy.

If the political landscape changes substantially in November and the policies of a political recession are subdued the monetary impact may rear its head and inflation will become more visible.  If the Fed seeks to reduce monetary growth we risk an extension of this anemic recovery or revisit of a recession.

We are showing clear signs of a recovery but the small businesses are still so uncertain of its duration and its quality that they are reluctant to participate.

Henry Oliner blogs at