Mission Not Accomplished


"The chattering classes believe strong government action has delivered us from calamity."

Over the weekend, top White House economic adviser Lawrence Summers pronounced that the recession is now over. Summers declared that thanks to the Obama administration's wise stewardship, economic stimuli and emergency bailouts, another Great Depression, set up by the prior administration, had been narrowly averted. Summers saw no impediments to the return of sustainable growth.

I hate to shoot down these high-flying expectations, but the economy is not improving. Washington's current policies have once again deferred the fundamental, market-driven reforms needed to redirect us onto a sustainable path. Instead, through aggressive monetary and fiscal stimuli, we are trying to reinflate a balloon full of holes.

Obama's claim of success largely derives from the slowing tally of job losses, the seemingly renewed strength in the financial system, pickup in home sales and home prices and positive GDP figures. But these 'achievements' fall apart under close examination.

First, a closer look at the jobs numbers shows that employment improved in sectors that benefited most directly from monetary or fiscal stimulus: government, healthcare, financial services, education and retail sales. Recent trade deficit figures (in which the deficit-reduction trend of early 2009 has sharply reversed) show how this employment growth is preventing needed rebalancing. Essentially, the administration is nurturing firms that cannot survive without subsidies and support.

Once stimulus is removed, the "saved" jobs will be among the first to go. The market should discount as pure bluff any claims from the Fed about an eventual "exit strategy" from current stimuli. Such an "exit" would bring about Bernanke's greatest fear-spiking unemployment.

Second, major investment and commercial banks are not back on their feet, but remain fundamentally insolvent.

Third, while it is true that home prices have stopped falling, this represents failure, not victory. True success would be a drop in home prices to a level that homebuyers could actually afford.

Finally, it is true that the GDP yardstick shows an economy returning to growth. However, as I have often repeated, this measure has deep flaws that render it almost useless for judging the soundness of an economy. Currently, the figures are merely reporting increasing indebtedness as growth.

The chattering classes believe strong government action has delivered us from calamity. For them, at least, it's "mission accomplished!"

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