But the recovery has reached a point where it looks to be self-sustaining, that magic point when growth begets more growth, hiring begets more hiring, spending begets more spending.
The data points for this optimism are to be found in recent reports on private payrolls (averaging just under 200,000 jobs per month for the past year), gross domestic product (growing at an annual rate of 3 percent), consumer confidence (as high as its been since 2008) and income (up 5 percent in the past year before adjusting for inflation).
On Wall Street, the Dow is at its highest point in nearly four years and Nasdaq at its highest point in a decade, reflecting both record profits and renewed investor confidence. Federal and state tax revenues are beginning to come in better than projected and households are continuing to whittle down their debt, with a savings rate of 4.5 percent. There are even enough green shoots in the housing market to suggest that residential construction might contribute to GDP growth this year rather than subtract from it. Revisions of government data are now reliably up rather than down.
And yet, there are those on the Republican right and the Democratic left who have so much invested in a bad economy that they are reluctant to acknowledge any of this good news.
If all you did was to listen to Republican presidential candidates (a cruel and unusual punishment, I realize), you would surely be under the impression that the country was teetering on the brink of bankruptcy, businesses were barely getting by under the weight of excessive taxation and regulation, and most of the middle class was standing in bread lines. Their relentless demagoguery has undermined the recovery as much as the gridlock politics practiced by their Republican counterparts in Congress. When forced to confront the facts about the economy and the financial markets, the best response these jeremiads can come up with is that it could have been better.
There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more.
There is no denying that an official unemployment rate of 8.3 percent is too high and understates the weakness in the job market. But too much of their gloomy analysis is based on a misguided assumption that it’s possible to put the nation on a sustainable growth path without making the painful but necessary structural adjustments required to an economy left badly out of balance by the Bubble Economy.
It is true, for example, that with additional borrowing and spending, we could rehire laid-off teachers and police officers. That would certainly boost employment in the short term, reduce class sizes and make us all feel safer. But the reality is that, even if the economy were to improve as a result, it would be many years before tax revenues return to where they were at the height of the bubble. At some point, spending by state and local governments will have to be brought down to match the level of taxes that their voters are willing to pay. The notion that once unemployment falls below 6 percent everyone will join hands and finally put the fiscal house in order — well, that’s nothing more than political fantasy.
Tax revenues, however, aren’t the only thing that are unlikely to return to pre-crisis levels.
Relative to the income of the people who live in them, housing values in much of the country were simply too high. We won’t see those valuations again for many years, and while that may cause problems for some households, it’s a good and necessary development for the economy as a whole.
Surely most people would agree that a downsizing of the financial-services industry is in order, both in terms of the number of people who work in it and the amount they're paid. That adjustment is well underway, as New York officials acknowledged last week in predicting a sharp drop this year in Wall Street bonuses. Does anyone really think that the government should try to stimulate the economy in an effort to delay or prevent such an adjustment?
It wasn’t just finance and homebuilding and government that over-expanded during the bubble and are now in the process of right-sizing. The list also includes travel and leisure, retailing, health care and commercial real estate development. Does it make sense for the government to keep extending tax cuts in an effort to resurrect jobs in those sectors that will inevitably disappear when the stimulus ends?
The fact that employment, income, profits and confidence are all moving in the right direction means two things.
First, it means that fiscal and monetary stimulus succeeded in stabilizing the economy and financial markets. To say that they failed, or that they were unnecessary, is ideological nonsense.
The positive economic news also means that the economy is in the process of shifting workers and capital to new and more productive sectors and companies. At this point in the recovery, the focus of public policy ought to be on supporting and accelerating that process, not on trying to delay and thwart it with more stimulus.
One way for government to support it would be to get its own finances in order. This is not mindless austerity, as some would have you believe. It is the restructuring and right-sizing of the public sector that, as a practical political matter, only happens when the fiscal pressure is on. It can easily be phased in without throwing the economy into recession.
At the same time, government can accelerate the economic restructuring by stepping up its investments. These include investments in infrastructures such as roads, bridges, transit systems, electric grids and air traffic control systems. They also include investments in the education and training of more engineers, scientists and technical workers needed for a more high-tech, export-oriented economy.
Such investments have large and proven long-term payoffs. And, as any business executive will tell you, the perfect time to make them is when the cost of borrowing is at an all-time low and there are lots of unemployed Americans eager for the work and the training. The fact that Republicans can no longer recognize the distinction between such productive investments and other forms of deficit spending tells you how unbusiness-like their economic policies have become.
The choice we are presented between more stimulus and more budget-cutting is a false one. At this point in the recovery, the right policy is to cut and invest, while having the patience and humility to allow the economy to continue putting itself back into balance.