We have had recessions in our modern history like the 1990 recession that, had it not been for the presidential election campaign that magnified the turbulence and brought it to the fore, it would have gone unnoticed. We also have had major recessions like the ones in November 1973-March 1975, July 1981-November 1982, and the December 2007-June 2009 that rocked the system beyond our wildest expectations. Why are some more painful than the others?
There are recessions that are due to miscalculations that result in overspending by consumers/government and overbuilding by manufacturer and builders. That is, our "irrational exuberance" propels us, not only to order more than what we need, it thrusts us into a state of mind to believe that tomorrow is always bigger, better, and brighter. Therefore, we expand our capacity as well as our orders beyond our means and needs. In this case, the economy needs a diet regiment and maybe, a surgical procedure similar to what Greece and the rest of the Europe are currently experiencing, a procedure that is not unique to them.
Since the 1980s, we in the West have engaged in expansionist fiscal, monetary, as well as exchange rate policies that were not sustainable by any means. We have all, at times unnecessarily and irresponsibly, cut taxes and expanded the government expenditures to the extent that people have come to demand them without expecting any harmful short-term or long-term repercussions. Cutting taxes has become a cure-all medicine. We want to reduce the deficit by cutting taxes. We want to wage wars without paying for them. We want low interest rates without the inflation that usually ensues, etc., etc. We all have become addicted to seemingly "free things."
Even though these expansionist fiscal and monetary policies have led to huge consumer debts, created real estate bubbles, and a mind-boggling national debt, we are still adding to them partially due to ideological beliefs and partially by necessities of today's economy.
Even though the environment problems during the 1970s and early 1980s were difficult and without precedent, they were less formidable than what we are experiencing today. Then, we needed to overcome stagflation without the dysfunctional financial system. The backbone of the economy, the banking system, was rather well and operating normally. That is, despite the S&L fiasco and despite the hundreds of billions of dollars that we had to spend to shore-up the Savings and Loans, the banking system as a whole was not in a dire situation as it has been in 2008-2009. Banks were not snake-bitten as they are today. Nonetheless, it took us more than 10 years to overcome that nasty period of stagflation and financial predicament. So, what do we do to prevent another 10-plus years of lethargic economy like we experienced in 1970s here in the US -- or the extended recessionary period that Japan suffered?
The fastest and surest way of creating jobs is for the government to spend hundreds of billions of dollars today and directly hire the unemployed to do whatever needs to be done -- building roads, airports, and bridges, etc. But we know that the political environment is not conducive to this type of no-nonsense undertaking. The President is not going to propose it and Republicans and "blue-dog" Democrats will never go for it.
The second best policy is to make it profitable for the businesses to do what the political system seems to be either unwilling or unable to do. That is, give businesses investment tax credit for a limited number of years, say two or three years. This way we do not need to trust them to do the right thing for themselves and the country, which is what an unconditional tax cut would do, and when they do the right thing, we reward them with tax write-offs. This policy would increase investment, which spurs the economy and allows our businesses to upgrade their systems to more efficient, more competitive, and more profitable ones.
Another serious problem we have is the lethargic government spending in research and development. This is important for both short-term and long-term prosperity. In the short-run, it would generate incentives to create new high-paying jobs and in the long-run it would lay the foundation for a new wave of commercial activities similar to the electronic boom and the burgeoning green energy technologies. We all benefit from such schemes if politicians will put the country first.
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