Why is the Economy so Bad?

We must have no carelessness in our dealings with public property or the expenditure of public money. Such a condition is characteristic either of an undeveloped people, or of a decadent civilization. America is neither. —Alexander Hamilton

Why is this recovery so tepid? Recessions should end with a spurt of growth; the more severe the recession, the more robust the recovery. President Obama is fond of saying this has been the worst recession since the great depression. At least officially, the Great Recession ended in June of 2009, so by this time we should be rocketing to parts unknown with jobs and opportunity for all. Instead we have anemic growth? Where is the economic growth, where are the jobs, why hasn’t housing recovered, and why has government’s share of the economy remained stubbornly high? What’s wrong this time? Why is it so different?

Actually, it’s not entirely different. We’ve seen this kind of lousy recovery under Roosevelt, Carter, and now Obama. Funny, they all followed the same economic policies. These three presidents didn’t like business all that much, so they tried to lift the economy through government action alone. Bad choice.

Much of the blame rests with computers. The use of computer models to predict the economy is called econometrics. There is a killer assumption in the econometric models favored by Progressives. That invalid assumption is that a dollar spent is a dollar spent and it doesn’t matter if it comes from the public or private sector. In the real world it matters—a lot.

Government spending for useful infrastructure or basic research can pay dividends, but transfer payments harm the economy. There is no long term benefit, recipient disincentive becomes expectation, and it delays clearing the market so the economy can have a real recovery. That’s not to say there are no long term consequences. The debt remains to haunt our grandchildren.

(By the way, this is why Obama talks about crumbling bridges and highways. He wants to take our eyes off the fact that the vast majority of spending is transfer payments.)

Every dollar spent in the private sector is a pass/fail test. If the producer makes a useful product or delivers a service people want, more dollars get spent on it. People get hired, supplies get bought, and someone ends up making money. If nobody wants the product or service, the business goes only so far before it closes shop. This even goes for large corporations that test-market a product—it either makes it to the next level or gets dropped. Real world feedback is swift, unrelenting, and sometimes harsh, but it constantly reallocates spending to the greater public good.

There is no test for government spending. The computer model said it should work, and if it doesn’t, Progressives believe it means we didn’t spend enough. This attitude is true for reviving an entire economy, but you also hear it said about education, alternative fuels, or solving poverty. Just spend more and all the glorious goals will magically be met. If you don’t believe politicians think all failed programs are due to under spending, then you’re not paying attention to what they say and how they vote. The prevailing opinion is that computers can’t lie, so failure must be the result of not pushing hard enough against the model. Except human beings wrote the code for the models and those human beings had all the frailties prevalent in the species.

We took a road trip through Europe with a family member that shall remain nameless. He was a map fanatic. All he did was read and analyze maps. He drove us crazy with his erroneous directions. That is, until we discovered why his directions were frequently wrong. He kept his head buried in his maps and never looked out the car window. The solution was easy. We stuck him in the back seat and let him jabber away. Meanwhile, we followed road signs and got to our destination with speed and safety. This is the problem with today’s economists. They forget to lift their head and look out the window at the real world. Their models suck, and they don’t know it.

The reason this economic recovery is so horrid is because our current crop of politicians do not trust the market and believe an omnipotent government can spend the economy into prosperity. They’re wrong, of course. And the pain for their error will soon be upon us. When interests rates raise to historical norms, the interest expense on the $16+ trillion dollar debt will crowd out all good intentions and cause misery for hundreds of millions of Americans.

Computer models are near worthless for predicting regional weather one year out, yet an economy is even more complex. The only way you can write an econometric model is to use the economists favorite assumption—all else remains equal. Yet, when did all else in the world remain constant? The closest answer is during the Dark Ages. Apparently, that’s the economy the Left is bent on replicating.

James D. Best is the author of the Steve Dancy Tales and Tempest at Dawn, a novel about the 1787 Constitutional Convention. Look for his new book, Principled Action, Lessons from the Origins of the American Republic.