Are things getting better?
That’s difficult to know, because good news often turns out to be bad
news.
Here’s an example. Personal
savings have increased.
Recent reports indicate that consumer spending has declined,
but savings are up. In other words,
people are saving more and spending less.
What’s wrong with that?
The American economy is driven mostly by consumer spending, which
accounts for about two-thirds of all activity.
When people save, they buy less of everything from food to
vacations. Fewer new jobs are created.
Saving money is also essential. Most people have put too little away to
support themselves in retirement. They
may be forced to rely on Social Security, but that program may itself come up
short when many of today’s workers are ready to retire.
Savings can boost the economy by providing funds for loans
to businesses and homebuyers, but they don’t produce the immediate lift to the
economy that spending does.
The increased savings rate may be an important sign about changes
in the American economy caused by the Great Recession. If the economy can collapse suddenly, people may
realize they need nest eggs, just in case they lose their jobs.
Protecting oneself against such setbacks is a valuable
lesson that had largely been ignored in favor of promoting spending. But worrying about the future may undermine
short-term recovery.
Second example: the Federal Reserve has been helping
recovery from the recession.
While the Fed cannot increase government spending or alter
taxes, it can boost the economy by reducing the cost of borrowing.
The Fed lowers interest rates to make it easier to borrow
for a new home or to expand a business.
When these moves take place, they create new jobs.
Congress has refused to approve any additional government
spending for job creation, because, without a tax increase, it would make the
federal deficit even larger. Cutting
back on the size of government means recovery is left to the private sector and
the Fed.
It has cut interest rates to historically low levels. And its policy has been successful in
stimulating borrowing.
For investors, including most pension programs, by lowering
interest rates, the Fed has driven them to the stock market. To boost their income, they turn from lending
to investing in corporate stock. When many
buyers chase stocks, their prices increase.
That’s just what has happened, and the stock market has hit
record highs. But then a strange switch takes place.
If there’s good economic news, which everybody wants,
investors guess the Fed will allow interest rates to increase. The conventional wisdom is that investors will
start lending to business and cut back on stock purchases, leading to a decline
in stock prices.
These days, just the hint of good economic news has the odd
effect of causing the stock market to fall.
Without the Fed increasing interest rates, the net result of good news can
be a loss of gains for pension plans and other investors.
Good economic news, which should cause stock prices to
climb, is bad news, pushing those prices down.
There have been good times when both increased interest
rates and a rising stock market have been possible. But that’s not today’s conventional wisdom.
Third example: cutting taxes.
Another switch from good to bad occurs when taxes are
reduced. Of course, just about everybody
wants to pay less tax, so tax cuts should be good news.
Unless governments resort to more borrowing, which amounts
simply to putting off payment and paying interest as the price of the delay,
tax cuts force them to reduce spending and reject new demands on the public
treasury.
Here’s one recent example.
The sudden emergence of the ISIS terrorists has posed a dangerous threat
the U.S. cannot ignore.
But taking military action against ISIS is already running
up federal spending, and the effort will require billions of dollars. Some of the same members of Congress who
steadfastly oppose government spending and demand tax cuts also seek strong
U.S. military action against ISIS.
Holding the line on taxes can lead either to more borrowing
and government debt or to cuts in programs like Medicare and Medicaid to find
the funds necessary to combat new terrorist organizations. Either way, the good news of tax cuts can quickly
turn into the bad news of more debt or more cutbacks.
The problem seems to be that we want to see only one side of
major issues. The world has become more complicated
and making choices between good and bad is a lot more difficult.