The Cleansing Power of Recessions (Lawrence Kudlow)

[Wretched Excess]

not exactly adam smith, but who is?  this is all true, and insightful, and all that, but it
isn't going to impress many voters in november.

The Cleansing Power of Recessions

Recessions are part of capitalism. They happen every so often. We've had two in the last super-prosperous 25 years. And it looks like we're entering a third one after Friday's jobs-loss report.

The unemployment rate went up to 5.1 percent, which is still a low number in historical terms. But the March labor report showed a loss of 80,000 payroll jobs, while payrolls in the prior two months were downwardly revised by 67,000. Non-farm payrolls have fallen for three straight months after peaking last December. Private-sector jobs have dropped four consecutive months.

This is a big warning sign. Within the private-sector report, professional and business services payrolls -- one of the biggest gainers over the past 15 years -- dropped 35,000, the third straight monthly decline following a December peak. Meanwhile, the household survey that picks up entrepreneurial small-business totals is now down 678,000 jobs since a peak in November.

The recessionary handwriting looks to be on the wall. Other recession indicators used by the National Bureau of Economic Research, such as disposable income and overall business and retail sales, are now several months below their peaks of last fall.

Lest we get too gloomy, there were some positive spots in the employment report. For example, the median duration of unemployment actually fell to a fifteen-month low of 8.1 weeks in March, the lowest level since December 2006. This indicates that about half of the unemployed are finding jobs in about two months. (Hat tip to Prof. Mark Perry of the Carpe Diem blogsite.) Additionally, aggregate hours worked in March actually rose, as did the private and manufacturing work weeks.

So while there is an economic correction at work, it could prove relatively mild. Let's remember, the U.S. has experienced ten recessions since 1947, averaging ten months in length. But in the more recent high-tech quarter century, in which tax rates and inflation have been historically low, the two recessions of 1990-91 and 2000-01 lasted only eight months.

If the current slump began in November, it could be over by late summer.

And let's also remember that recessions are therapeutic. They're even necessary to create the foundations for the next recovery. Economic excesses always occur in free-market capitalist economies, and from time to time they must be cleansed. Just think about the excessive risk-speculation, leverage, and housing prices of the current episode. If anything, recessions make for clean starts.

And think of this: Despite housing woes, credit problems, and the sub-prime virus, banks are still lending to businesses. In other words, we don't have a genuine, across-the-board credit crunch. This is very good news, and more evidence that an economic contraction will not be drawn out.

That said, there are two related issues that worry me. First is the continued decline in the value of the dollar, which has permitted the global commodities boom (energy and food) to leak into higher U.S. inflation. Bulging commodity costs have depressed the profits of non-financial domestic businesses, where after-tax earnings are down 24 percent from a peak in late 2006.

Profits are the mother's milk of stocks, businesses, and the economy. And because profits have fallen, some businesses are contracting and laying off workers in order to bring costs back in line with revenues.

If Washington really wants to help the business sector recover, nothing would be better than an across-the-board cut in corporate tax rates. This competitiveness-enhancing action would lower tax costs, boost jobs, and lift worker wages. The growth incentive would reignite the economy. A permanent corporate tax cut would be far better than a temporary consumer rebate.

The other worrisome issue is inflation. The March jobs report showed a continued easing of hourly wage growth. After a 4.3 percent peak in late 2006, average hourly earnings for non-management workers has slowed to 3.6 percent for the twelve months ending in March. Consequently, headline consumer inflation of 4 percent continues to erode average wages. While most all market observers are focused on the sub-prime credit crisis, it's the pick-up of inflation in recent months that has dampened consumer-spending power and corporate profits.

As lawmakers in Congress contemplate a massive FHA housing bailout package, they would be better advised to look more carefully at the recession-ending benefits of lower business tax rates and a stronger greenback.

In fact, liberal economists should look at a new Rasmussen poll in which 48 percent of voters say the best thing government can do is get out of the way by reducing taxes and regulations. Only 36 percent disagree. What's more, 59 percent of voters believe it's more important to create economic growth than to reduce the income gap between rich and poor. Finally, 49 percent say the best government policy is to reduce spending.

Keynesian-style politicians please take notice.

Link

[DixieBelle]

Excellent piece. And you're right, voters will not be impressed. Sad.

[Lord Undies]

In fact, liberal economists should look at a new Rasmussen poll in which 48 percent of voters say the best thing government can do is get out of the way by reducing taxes and regulations. Only 36 percent disagree. What's more, 59 percent of voters believe it's more important to create economic growth than to reduce the income gap between rich and poor. Finally, 49 percent say the best government policy is to reduce spending.

This lets you know people are not blindly stupid when it comes to the economy.  

BTW, Oklahoma seems to be booming.  If anyone is in dire hopelessness about employment, move to Oklahoma City/Norman.  I don't think I went anywhere that wasn't advertising for employees.   There are billboards along I-35 advertising opportunities.  

The restaurants were full.  The freeways were alive with cars.  Stores were busy.  People just are not acting like they are on their last dime.  

[Chris_]

In fact, liberal economists should look at a new Rasmussen poll in which 48 percent of voters say the best thing government can do is get out of the way by reducing taxes and regulations. Only 36 percent disagree. What's more, 59 percent of voters believe it's more important to create economic growth than to reduce the income gap between rich and poor. Finally, 49 percent say the best government policy is to reduce spending.

Those 36% will still be voting.  And they're idiots.   

[Ptarmigan]

I have actually heard the recession is no more. The recession happened in 2007 to early 2008. I worry that there is a trend for big government.

[Lauri]

I have actually heard the recession is no more. The recession happened in 2007 to early 2008. I worry that there is a trend for big government.

you heard its over? heck, the only articles ive read for the past year say "IF we're heading into a recession..." then go on to say whose fault it is.

[Lacarnut]

I enjoy watching Kudlow & Co but his Goldilocks scenario is a little too rosy. Although it's an election year and the news media is coming up with their doom and gloom, the economy and employment is in fairly good shape. I do look for inflation to jump up due to rising food prices.