A Prescription for Economic Recovery

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Now that the danger of hurricane Isaac has passed Tampa, the Republican Party can settle into its convention. However, as the convention opens, do not expect to hear details about their economic proposal – the issue that is of most concern to the population.

The Democrats have unveiled more of their economic agenda than have the Republicans, but neither party has fully disclosed what it intends to do. Furthermore, there is no indication that one can expect to receive more during the conventions than what has already been disclosed.

Playing coy with their economic intentions allows each party to change its mind, as feedback from the electorate is received. The parties also avoid having their agenda ambushed by the other side. While this might be good political strategy, it does not provide much direction to an economy that needs more confidence about the future.

Since the political parties are vague about their agenda, the Gazelle Index will step up to the plate and voice our opinion on what needs to happen. Several steps could help  turn the economy around. Those things include the following:

First: We should recognize that there is underlying economic strength in the economy, but several things are holding the recovery back. First economic growth has been  uneven. In economics, this is referred to as a coordination problem. Specifically, one sector is recovering at a time; rather than all sectors together. For example, when investment spending was occurring, consumers were not spending. When consumers began to spend, businesses started cutting back on investment.

Not until recently did the housing sector show any signs of life. However, when housing started recovering, consumer spending and business investment slowed down.

In general, the recovery has not occurred in a coordinated fashion.

Second: there is a lack of confidence in the recovery so everyone is sitting on the sideline hedging their bet. In a situation like such as this, it would help if the Federal Reserve focused more attention on the underlying strength of the economy rather than starting a new program of quantitative easing. What good does more quantitative easing do if consumers and small businesses cannot borrow money at low interest rates?

Third: Unemployment is high for several reasons. Specifically,  two-thirds of all workers who were displaced by the recession and have not been reemployed formerly worked in manufacturing or in construction.Those sectors need the greatest attention from the government. Policymakers need to figure out most of all how home buyers can take advantage of low mortgage interest rates, either to buy a new home or refinance an existing home. Again, low interest rates do not matter to people who cannot get credit.

The regulatory agencies have gone too far in clamping down on credit availability. If they would ease up a bit, the housing and construction sector would experience an immediate burst of energy. A very easy fix to the economy is to make the regulatory agencies allow individuals with good credit, rather than perfect credit, to get a home loan.

Fourth: Unemployment is most severe among African-Americans and Hispanics. Those two groups account for 40% of all unemployed workers. The government needs to focus on ways to address this issue. A national commission on unemployment is needed to explore all of the issues that are contributing factors, especially the poorly performing public school system. Growing economy more robustly will help, but only a little bit. A decade ago, even when the economy grew by 6.5%, black unemployment remained at 10.5%.  So growth is good, but growth alone is not enough.

Fifth: The Federal Reserve Bank should not engage in another round of quantitative easing. Short-term interest rates are close to zero and it is not having any impact on growth. Banks and corporations are simply borrowing the money and hoarding it. Instead, the FED should keep its scarce resources for a time when they are really needed- like the next recession.

Low interest rates are a clear signal that the economy is really hurting; just like a low priced used automobile is a sure sign that you are purchasing a lemon.

Sixth: The political parties need to get their act together and decide on an economic plan that will balance the budget, maintain economic growth and generate tax revenues at the same time. It does not take rocket science to figure that out. The Euro zone countries are a perfect example of what happens when you try to force feed a balanced budget by slashing spending too severely.

The political jockeying that is currently taking place has already destroyed confidence in the political parties, now its doing the same thing for the economy. Furthermore, the politics has failed to produce a solution to the problem and is undermining the economic recovery. Unfortunately, this may be the most intractable problem of all to fix.

Last modified: August 28, 2012

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