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Friday, September 2, 2011

How the Ball Lost Its Bounce




That is how many jobs were added in the August jobs report - zero.  At this point can anyone even trot out the cliched "unexpectedly worse" line to describe this report?  It's absolutely not unexpected if you understand how our economy operates.

Let me provide a quick picture of how our economy works.

Imagine a bouncy ball - it represents the movement of our economy moving forward in time.  As the ball moves upward, our economy is experiencing growth.  But as the economy grows, poor decisions or wagers accumulate.  Think about the tech bubble or the housing bubble.  As people continue to overprice certain stocks or commodities, overhire & overspend, the ball begins to become weighted down by all this - we'll call it excess.

Burdened by the weight, the ball begins to fall.  Somewhere underneath is a natural floor which the ball will hit.  This is the downturn of a recession.  But when the ball hits this floor, all the excess will be broken off the ball and the bouncy ball will do what bouncy balls tend to do when they hit the floor quickly.  It will bounce back.  And the cycle will repeat itself if left alone.

The problem develops when the government tries to alter the cycle.  Can government help?  Yes, but only when it understands how.

In 2008-2009, both Presidents Bush & Obama saw an economy in a death fall and they believed they could and should do something about it and they did.  Rather than allow the ball to fall to its natural floor, they attempted to arrest the fall - which they did.

(Wait a minute.  Are you giving President Obama credit for ending the economic downturn?  Absolutely.)

The policies put into place, mostly by Obama, created a soft landing place for our economy, sort of like a pillow, in an attempt to protect Americans from being hurt by the fall.  It arrested the fall before it hit a natural floor, thus keeping the downturn from going as low as it may have. 

But, unlike what Obama says, that does not mean he prevented another Great Depression.  In fact, he has ensured that we would go through a depression.

By cushioning the fall, protecting homeowners, bailing out banks & the auto industry, funding states, Obama prevented the ball from shedding the excess that had accumulated on it.  Now it just sits there, overweighted with no bounce.  It's not going anywhere for a while.  This pretty much represents, if not a literal depression,  then at least the quagmire our economy is stuck in.

Even worse, the president's administration is putting in place new regulations that will represent obstacles to growth, so that even if we can get the ball bouncing, it will be hard to build any momentum.

Contrary to how this recession was handled, look at how Ronald Reagan reacted to taking office under a similar economic downturn.

Reagan understood that a falling economy could not be propped up.  Rather than attempt to stop the fall, he & Treasury Secretary Volker put into place policies that actually accelerated the fall.  By doing so, the economy hit the floor sooner and quicker.  This created an even larger bounce than would normally be expected.  The economy quickly shed the excess and took off. 

In addition, Reagan's tax & regulatory policies gave the economy room to grow so the ball bounced higher and higher than ever before and created a higher floor for the next bounce.

President Obama will give a speech next week on jobs.  I wish it mattered.  Unfortunately, I don't see how it does.  As long as our ball sits on the ground, covered in excess, surrounded by new regulations and the threat of higher taxes, it's not going anywhere anytime soon.

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