It is one of the USA myths that the government’s stimulus measures are discouraging private investment by households, corporations, and banks. Uncertainty, fear of anti-business rhetoric, concerns about tax increases, and alleged “crowding out” of private access to funding are blamed for the persistence of slow growth, business contraction, joblessness. Rather than crediting the Bush and Obama administration measures to feed money into the economy in the wake of the 2007-8 global collapse, Washington is blamed for the slow recovery.
So let us start with the best study of how deep economic crises are overcome, by Reinhardt and Rogoff, ironically called This Time Is Different. The economists studied every single financial crisis and recession for which there was data, going back up to two centuries. And it turns out that historically there is no quick recovery for sick economic systems. The mildest recessions take 17 months to reverse, but the bigger the drop the slower the restoration. To bring things back on track in terms of output and employment takes, on average over 5 years.
Another antidote to blaming the American government for slow recovery comes here in England where, as is by now clear, the coalition Tory-Liberal government is alrady pursuing tax increases, cuts in government spending, and financial rigor. So with the government’s stimulus out of the way, there should be lots of animal spirits around, with capital spending financed by unhampered bank lending, right?
Wrong. Loans to small UK businesses (the key to hiring and growth) are sagging. They are now running £564 mn/mo, vs £663 mn a year ago, and £991 mn in the dark year of 2008. Total loans outstanding to small British businesses are £54.3 bn now which is less thatn small firms have on deposit with British banks, £56 bn. So our USA pattern is copied across the pond, and maybe it is not Washington’s fault after all. A financial contraction stops investment and production. The role of the government, just maybe, is to reverse the contraction.
More for paid subscribers follows starting with a new recommendation from Martin Ferera.
