Would the Economy Heal Better Without the Government's Medicine?

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Policymakers are running out of ideas to fix the economy. Just some of the efforts that we've seen that sought to keep unemployment low and growth high include:

  • August 2007: The Hope Now Alliance sought to prevent foreclosures.
  • February 2008: President Bush signed a stimulus bill consisting of tax rebates.
  • October 2008: The bank bailout rescued the financial and auto industries.
  • October 2008: The bailout bill also set aside money for foreclosure prevention, which created the Home Affordable Mortgage Program.
  • February 2009: President Obama signed the massive $787 billion stimulus package.
  • July 2009: Cash for Clunkers attempted to conjure up new demand for auto companies.
  • November 2009: The home buyer credit (first put in place in the Feb 2009 stimulus) was expanded and extended.
  • March 2010: A tax incentive for hiring passed.
  • September 2010: A bill passed to promote small business jobs and credit.
  • December 2010: The "Bush tax cuts" were extended.

And in the months of May and June, just 43,000 jobs were created, as the unemployment rate crept back up to 9.2%. Home prices are falling again. Growth was just 1.9% in the first quarter of 2011 and was very likely even lower last quarter -- if not negative.

Some argue that unemployment would be even higher without these efforts to fix the economy. That may be true: we can't know for sure. But obviously they haven't managed to produce anything near full employment. In his New York Times column today, David Brooks asserts that perhaps politicians on both sides of the aisle need to stop looking for a "magic lever":

These three groups -- bankers, Democratic Keynesians and staunch Republicans -- have one thing in common: They all believe they have identified the magic lever. They believe they can control their economic fate.

Some of us do not believe there is a magic lever. Deficit spending stimulates growth, but not by that much. Tax increases are bad, but they are not disastrous. We believe that there are a thousand factors that go into economic growth, and no single one is dispositive.

He's right: the economy is highly complex. No quick fix by the government or any other entity will suddenly spawn millions of jobs and create 5% annual growth in the U.S. As we've seen over the past few years, even a scattershot approach, using big buckshot ammo, fails to hit the target.

So what can the government do? Should it just get out of the way and give the economy some time to heal on its own? That's not what the American people want to hear. They want low unemployment, and they want Washington to make it so.

But this isn't realistic. The U.S. is recovering from very severe financial crisis and housing bubble. The path back to full employment and moderate growth can only be long and painful. The best course of action for the government might be to enact relatively modest legislation that merely ensures that the economy is as unburdened as possible so that it can slowly heal. As each sector of the economy slowly improves, spending will continue rise and jobs will return. Having patience might be the best strategy.

Read the full story at the New York Times.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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