Good economic news is often really bad

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.