Opinion and Economic Analysis and Banking & Finance

HICKS: Slow recovery doesn’t favor intervention

May 21, 2011

Most economists who study recessions and publish their own research argue that something can potentially be done to ease the transition from recession to recovery.

I am hesitant to fill this column with the technical aspects of economy theory. These lessons are rarely successful in my pragmatic household, but there is a time for everything; and this time of high budgets, incipient inflation and modest national recovery is a time for thinking folks to better understand the economic debate.

Despite jokes to the contrary, economists share a common set of beliefs forged by empirical observation of the world. Among these is that people respond to incentives with their best interests at heart and that, left to its own devices, an economy will recover from even the worst recession of its own accord. These questions remain in dispute: How fast will the economy recover and how much can government policy improve the speed of the recovery?

Many demagogues would have us believe that there are two schools of thought in economics: old line Keynesians and pure free-market types. The caricature of both groups of economists is that they are, respectively, free-wheeling spendthrifts or cold-hearted social Darwinists. These descriptions are convenient and wrong.

Virtually all practicing economists fall into a broad middle. At the risk of sounding elitist, I need to define practicing economists as those who conduct their own technical research, not those who solely interpret the work of others. Most active researchers conclude that markets adjust slowly from recession to recovery. The technical research on the matter is painfully obtuse and often densely mathematical.

Yet, there is an easy reality to the findings of this work. It describes workers reluctant to concede to pay cuts, families unwilling to uproot at the first sign of economic hardship, and businesses afraid to slash prices when demand drops. So, most economists who study recessions and publish their own research argue that something can potentially be done to ease the transition from recession to recovery, if well-timed and executed. These are big ifs.

This something comes in the form of monetary policy (lowering interest rates to spur more investment in new capital) or fiscal policy (a combination of lower tax rates and increased government spending to stimulate demand for goods and services).

Despite rhetoric to the contrary, we live in a world that has enshrined these ideas. Unemployment insurance, a progressive tax and most social programs automatically reduce taxes and increase spending as we move into a recession. These automatic stabilizers implicitly accept the reality that some government action can ease the effects of a looming recession.

So, as I argue to the angst of some of my colleagues, In that regard, the past two years have provided a great boost to those who argue for less, not more government intervention.•

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Hicks is director of the Center for Business andEconomic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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