Key to a Successful Economic Recovery: A Return to Free Market Principles

The economic recovery from the ‘07-‘09 recession has been timid at best. Unemployment sits above 9%, the U.S. is on the verge of default and real GDP growth per year is shockingly low (2.8% - compare that to 7.1% post the ‘81-‘82 recession). The cause of such a slow recovery (if we can call it that) is subject to much debate. Are people saving too much? Maybe, but the fact remains that consumers are spending a larger fraction of their income than the ‘83’-84 recovery and the personal savings rate of 5.6% is much lower than the 9.4% of that prior recovery period. Is the weak housing sector holding the economy down? Again, this could be a contributing factor, but lower housing prices should be preferred to artificially inflated prices. And the weak housing sector seems to be more of an effect of the dismal employment environment. To be sure, jobs and housing exhibit a symbiotic relationship, so if unemployment improves it’s likely to promote a healthy housing recovery.

So what’s really holding the U.S. down these days? John Taylor, a Stanford economics professor and senior fellow at the Hoover Institution, blames the current interventionist economic policy of our country today as the root of our dismal recovery. Back in the ‘80’s and ‘90’s (where more than 44 million jobs were created and sustained/stable growth prevailed), economic policy was decidedly non-interventionist. Monetary policy simply focused on price stability and regulatory reform encouraged competition and innovation. Throughout the last decade, the government has become much more hands on. Active monetary policy has kept interest rates at extremely low levels, interventionist measures have resulted in the unprecedented bailouts of Wall Street and regulatory reform is well, doing more than its fair share of regulating (see Dodd-Frank and Consumer Protection Act). Perhaps, as Mr. Taylor suggests, the solution to our weak growth and high unemployment is to loosen the reigns. Perhaps the way forward, as he says, is not with more spending, greater debt and low interest rates, but with spending control and a return to free market principles.