Uncertainty is plagueing the Economy

Politicians, economists and just about everyone else has an idea about why the economy shows little sign of recovering anytime soon. Reasons include 'George Bush messed it up so bad it will take time', this of course is a rehash of the Great Depression charge that Herbert Hoover ruined the economy by being stingy and not doing enough. We have heard that the stimulus is the answer but won't work as quickly as earlier planned.

I am not an economist and don't play one on TV, but do know a few things about economics. First of all very little of the stimulus has been spent. This was warned by many people because the projects they targeted need to get through many layers of bureaucracy to get to be 'shovel ready' as VP Biden likes to say. I personally don't believe these projects will work either, but as it stands very little has been spent, somewhere around $29 Billion out of $787 billion.

My observation is that uncertainty is holding things back more than anything else. Large enterprises are not expanding, small enterprises are not expanding or starting. This is due to many things. At the beginning of the downturn inventories were astoundingly high. This is working itself out and will be back to normal soon. Many companies have cut costs by reducing hours worked such as giving mandatory days off, and furloughs. Before they start hiring they will return these people to full time. When demand does pickup they can ramp up quickly without massive hiring.

The big question remains why is demand not increasing? This is where paying attention in Macroeconomics in college would have helped people. Demand is increased by many things, expectation of decreased supply, expectation of future increases of raw materials, expectation of competing goods as well as a multitude of other factors (this is why economists rarely agree about their models). Does something about the last one sound familiar? The government is spending money like never before. Businessmen know that you cannot continue spending in massive deficit for a prolonged period. Something has got to give. Either new revenue needs to come in, (increased economic activity, increased taxes etc) or expenses need to be cut. If a businessman were to guess he would have to say revenues are not going to increase and expenses will not be cut so taxes will be raised. Since said businessman does not know what taxes will be raised and on whom, he cannot take risk until he knows those things. In the Congress we have two pieces of legislation that also will affect every business without a lot of details. A health care takeover bill and an energy takeover bill. We do not know the extent of the mandates, nor the details of how they will be administered so again no risk is advisable until we know these things.

That takes care of business. How about consumer spending? The guy or girl that still has a job sees the newspapers too. We see a lot of big changes coming without a lot of details. Do we buy new cars? Do we buy that big screen TV? How about a second home for investment? Not likely on all counts. We also see that banks are becoming solvent, but lots of smaller banks are being closed. This of course reduces competition and gives more power to the big banks that the government propped up. That doesn't signal good things for the consumer, so again risk is not advisable with the prospect of losing one's job in the near future.

What will turn it around? Certainty! As harmful as new taxes will be, or the health care or energy bill, at least if we know what flavor they will take the consumers and businesses can make plans. One thing I can predict is that if government health care changes are undertaken it will be good for large enterprises, but very bad for smaller enterprises. I am sure those business owners believe the same. Small businesses usually lead us out of recession. That cannot happen this time because they will be the targets of health care. Energy law changes will hurt smaller enterprises and consumers the hardest. That sounds like a double whammy to small business. They won't be adding workers any time soon.

So are we just out of luck to fall into a second Great Depression? I don't think so, but times may get worse before they get better. Money is nearly free. Government is offering incentives to their pet industries. Inflation is on the horizon. For me it is still impossible to predict how long this will go on. Government will work with large enterprises and when they recover the economy will recover. This will take longer and be more detrimental to smaller enterprises. This will lead to a less healthy private sector and a larger public sector, so even after it recovers it will not be a robust recovery since the government will be pulling the strings. This is not an optimistic future, but it is the one I see. As negative as it sounds removing uncertainty may be the best thing they can do, God help us!