Summer Vacation for the Economy

Since the economic collapse in 2008, we’ve seen a relatively predictable calendar pattern emerge, namely, that economic growth peaks in the first half of the year, with momentum coming from the Christmas holidays, and it cools throughout the late spring, and nearly seems to stall during the summer months.  It happened last year and the year before, and it’s happening now.  There’s a variety of factors that contribute to this, and while some are temporary, such as those prompted by weather (tsunamis and unusually warm springs) we’ve settled into a fairly predictable short term cycle: after Memorial Day, growth stalls.

Fed Chairman Ben Bernanke told members of the Senate Banking Committee as much today in testimony.  Bernanke, regularly trotted out to give his views on prevailing economic trends, has been right more often than he’s been wrong, but his ultimate track record will ultimately be judged years from now.  But, on this, I’d daresay to posit that he’s pretty accurate.  His prognosis is that while economic growth, particularly as it relates to job creation, has been frustratingly slow, is overall headed in the right direction.  The problem is not any inherent economic trend, it’s that the rates of growth are just not where they need to be relative to the labor market.

Paul Volcker, the giant (6’7) former Fed Chairman who heads a group of former political figures issued a report today that took a look at the rate of government spending and the role it plays in the recovery.  Basically, the government is in a unique position to stimulate the economy, as it can create demand for jobs, services and goods by spending on infrastructure, aid to states, along with social and defense programs.  Volcker cautions that if we were to cut government spending in 2013 by the levels mandated by the Budget Control Act (which kick in automatically should Congress and the President fail to reach a deal on tax rates) the damage to the economy would be enormous, potentially putting the country at risk of entering a recession again for the second time in five years.

I’ve long espoused substantially reducing the federal deficit, but not at the expense of economic growth.  The federal government, like it  or not, is the most effective catalyst for economic growth in today’s anemic economy.  Deficits should be brought down by a radical overhaul of our nation’s tax policy, but not by cutting spending so much that it ends up destroying jobs growth.  It’s a long, boring slog, as much of economics is, but it’s the best possible course when judged against all of the others which inflict far more pain on the United States.

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