The economy grew at a rapid 6% annual rate in the fourth quarter of last year. For many, news of rapid growth appears inconsistent with widespread job losses, high unemployment rates and widespread bank failures. Much of the inconsistency stems from the difference between the level of business activity and its change. Changes from very depressed to not quite as depressed may impress economists and statisticians. They don’t impress those struggling to deal with current economic conditions.
There has clearly been some improvement in the business climate. Nationwide, housing prices are up about 5% from their lows last spring. However, prices remain 30% off their highs. The collapse in home prices has left a quarter of all mortgage holders with negative equity in their homes. Negative equity has meant significant loan losses for banks. In addition to the equity decline in their homes, many homeowners face a challenging job market. In spite of the improvement in business activity and increased orders for new business, layoffs continue and companies are reluctant to rehire workers.
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February 5, 2010
There were monumental changes in both the economy and economic policies this past year. While business activity continued to decline during the first half of the year, by mid-year the economy began to grow.
Some attribute the turnaround in the economy to an unprecedented 18% increase in federal government spending. However, in spite of much talk about government stimulus, increases in federal spending tend to be associated with economic weakness rather than strength.
Some economists believe that government spending can boost total spending. This view first emerged during the 1930s when total spending collapsed and prices were falling. Few associated the collapse in spending with the Federal Reserve’s monetary restraint. Desperate to restore spending, politicians and economists reasoned that if government increased its spending then total spending would also increase. The problem with this line of reasoning is that the federal government cannot spend money without first taking it from someone else.
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Tags: Economic, Economic Policies, Economy, Federal Spending, Financial Spending, Government
