The value of goods and services produced in the United States from October to December rose at an annual rate of
5.7 percent. In the normal course of events, this would be great news.
To put it in context, it means that, if this trend continued, the average American would see his or her standard of living double in just under 16 years. That would be remarkable. Sadly, it is not to be. Here’s why.
The months just after a recession usually see the economy growing quickly as workers and factories gear back up. The 5.7-percent rate from last quarter is tepid by historical post-recession standards. More worrisome is that this is all the growth that could be squeezed out of a now-$850-billion stimulus and a federal budget that grew by double digits. Why is growth so slow?
Businesses take risks. Risk tolerance is the hallmark of a successful businessman and entrepreneur. But those same businesses dread uncertainty. Risk is something that can be predicted or reduced to a probability. Uncertainty cannot.
The business environment today is rife with more uncertainty than any time since perhaps the Civil War. The reasons are simple: health care, cap and trade, the employee free choice act, financial regulation and inflation. The ambition of the federal policy agenda is its own undoing. The greed for change will stall job growth and will slow the economy for the foreseeable future.
Let me be clear; this is not a partisan problem. While most businesses will suffer enormously from cap-and-trade legislation, many will benefit. Neither group will hire, invest or expand while the political direction is so uncertain. This uncertainty will place a drag on the economy that will persist most likely until the next national election. But there is more.
It is clear that, with the stimulus, the Troubled Asset Relief Program and two consecutive record federal budgets, we have traded a bank meltdown for fiscal stagnation. No rationalist can expect that taxes are not destined to rise. While it is easy to play class warfare with taxes (it has a long pedigree), any new taxes will strike hard at those most likely to create jobs.
This deficit is likely to be joined by inflation. This inflation is unlikely to enjoy accommodation by the Federal Reserve. Interest rates will rise, probably this year, certainly in the next, placing a drag on the recovery.
This administration entered office at a difficult time. History will judge kindly its early actions on the economy. But growing the federal budget in the face of this deficit, when most of the stimulus goes unspent, will be viewed as reckless. All is not lost. A shrinking federal budget would signal seriousness about the deficit where none is now perceived. Unless the federal government makes serious and immediate reductions in the size of the debt, we may well enter a generation of misery like the 1970s. Judging from what I hear on the radio, the music won’t be as good, but the economic malaise will be just as damaging.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at firstname.lastname@example.org.