From: Tom Lane
Received: Oct. 5
As I listen to all the political rhetoric about “who can fix the economy,” it strikes me that we are distorting how the economy works. No one controls the economy, as much as each party would like you to believe that they have the magic formula. There is not any magic.
Think about it for a minute, if the president or even the government could control the economy, then why in the world would we ever have a recession or depression? It is against their political future to preside over a recession. But we still have them.
We have been gathering information about the economy for almost 200 years, and it follows cycles of ups and downs. It has repeated this over and over, and here is how it works. Suppose we are in a slowly improving economy like we have now, and the population is gaining confidence in their individual future.
So they spend a little more money and that leads to increased demand from the producers or servicers, and they have to hire more people and that creates more positive feelings that things are getting better. As this rising cycle continues, people and companies may borrow money to spend more, and more hiring increases a competition for higher wages and therefore, even more money to spend. This is the greed side when everyone wants more.
As the cycle nears the top, a variety of things can happen to turn the mood. But something always makes individuals and companies think that maybe we have borrowed too much, spent too much, or other reason for slowing down. When the buying slows down, demand slows, and then companies begin to cut back on hours, or they begin to lay off employees. Then, the fear side kicks in. As more people lose jobs and companies cut spending, demand keeps dropping which continues to add to the problem and pretty soon we are in a recession.
If banks or companies or individuals had overextended their borrowing, they may face bankruptcy. All this increases the fear factor until, at some point, it just settles down. After all, we still have to spend some money. Then, it turns again and we have “pent-up demand.” This means that we had put off spending and saved a little, and now we need/want to start buying.
This starts the cycle all over and optimism begins and the economy begins to improve. This is nothing new. And the government tries to tweak this and influence it through spending levels and interest rates and monetary policy. But ultimately, the economy has a collective mind of its own.
No one has ever figured out how to avoid the cycle. So when someone claims that they can “fix it,” they are not being truthful. They can do small things to influence, but be clear about this. No one controls the economy. We all do in our collective spending habits. It is how it works.