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The economics of recovery

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Charles Rawlins’s letter of Feb. 5 is full of so many economic fallacies that it’s hard to know where to begin. Rawlins argues that getting the economy going again requires stimulating consumer demand, because that will lead businesses to invest and create jobs. What is conspicuously absent from his letter is any actual data. The data do not support his argument in the least.

Real personal consumption expenditures peaked in late 2007 before the recession and by late 2010 had already recovered to that peak. Consumption today is well ahead of that peak and up substantially from its weakest point in mid-2009. The economy is not suffering from lack of consumer spending, putting a substantial dent in Rawlins’s case for more government spending on consumer stimulus.

The problem instead is private investment spending. One of the first things economists teach about business cycles is that the most variable part of spending is not consumption but the investment that firms make in capital. Private investment spending has only recovered about half of its losses from the recession. Firms are simply not willing to invest in the equipment and research and development to make new products and create new jobs. That is the problem to be solved.

In fact, consumers cannot spend what they haven’t earned, and government cannot spend what it hasn’t taken from producers through taxes, borrowing or inflation. Rawlins falls for one of the oldest fallacies in economics, and one that has to be pointed out every generation. Demand does not create wealth, the production of wealth creates the ability to demand.

If we want to speed up this anemic recovery, we need to stop paralyzing businesses with the uncertainty that comes from a federal government that can’t get its own fiscal house in order and that continues to pass programs and regulations that shackle the productive power of the private sector. When firms don’t know what government is going to do next, and what government does do is to raise their costs and then vilify business people for trying to respond by adjusting how they produce their goods and services, we should not be surprised that businesses are unwilling to invest in the future and create new jobs in the process.

It’s not insufficient consumer demand that’s blocking recovery; it’s a rhetorical and regulatory environment that is hostile to the very source of new products and jobs: private investment.

Steven Horwitz

Canton

The writer is the Charles A. Dana Professor of Economics at St. Lawrence University.

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