A Recovery Stymied by Government?


Why has the recovery from the Great Recession of 2007 – 2009 been so slow?  Many mainstream economists blame structural problems in the economy such as more global competition for business and technological progress which replaces people by machines.  Other economists blame greatly increased government regulation since 2009 such as the Affordable Care Act in healthcare, The Dodd-Frank Act for finance and many new regulations from the Environmental Protection Agency.
CaptureThe economist Casey Mulligan, writing in yesterday’s Wall Street Journal, “A Recovery Stymied by Redistribution”, makes a case that government programs designed to alleviate the effects of the recession have made it deeper and more prolonged.  Such actions include:

  • Long-term unemployment insurance
  • Looser restrictions on food stamps which do not require recipients to seek work
  • Mortgage assistance programs which set mortgage payments at “affordable” levels
  • New rules for consumer bankruptcy with special emphasis on current earnings

Mr. Mulligan’s point is that all of these new programs, like taxes, reduce incentives to work and earn.
But, by definition, structural effects are endemic and can’t be overturned.  Also, some government reaction to the financial crisis, in order to prevent recurrence, was inevitable.  And it is natural for the government to be responsive to the human misery caused by the recession.  All of these points of view help us understand what has happened but don’t provide much guidance for boosting economic growth going forward.
The Great Recession was fundamentally caused by the bursting of the housing bubble which destroyed trillions of dollars of wealth for tens of millions of Americans.  The recovery won’t speed up until many more millions of consumers feel comfortable in spending more money. We need to put more money in their pockets.
A very good way to accomplish this, as I have been saying over and over again, is through fundamental tax reform.  The idea would be to lower individual income tax rates for everyone, and pay for this by closing the loopholes and deductions which primarily benefit the wealthy.  This will put big bucks in the hands of the two-thirds of Americans who do not itemize their deductions. Since these are the middle and lower income wage earners whose wages have been stagnant for many years, they will spend this new income in their pockets thereby giving the economy a big boost.
Let’s do it!

2 thoughts on “A Recovery Stymied by Government?

  1. All true, very true, Jack. But I think the emphasis as to fault should be laid squarely to an administration that just does not care about an economic recovery that puts people back to work and lessens their dependence on government handouts and unemployment benefits. The fact is this administration is producing an economic voting block that depends on a weak economy.

    I also believe that one way to release real wealth into the economic cycle is to simply not tax Social Security benefits or other benefits or income going to Senior Citizens with incomes under $100,000 individually or $200,000 as a couple.

  2. I have described several reasons why the economic recovery has been so slow, without affixing blame for what has happened. But more important is whether or not we can overcome these headwinds by adopting new policies which will move things forward. I have suggested one particular way to do this, namely broad based tax reform. But ultimately, the President has the most clout in getting something done. If his administration is either unwilling or unable to move things forward, then it is his fault and the Democratic Party will likely suffer the political consequences.
    Your proposal for relaxing taxes on social security benefits would help, but then we’d have to offset the revenue loss in some way. We simply cannot ignore our very serious deficit problem.

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