If I had a hammer, I’d hammer in the morning, I’d hammer in the evening, All over this land. I’d hammer out danger. I’d hammer out a warning. I’d hammer out love between my brothers and my sisters all over this land. I was fortunate to have the opportunity to see Pete Seeger last week at a local music festival. Seeger is truly a folk music legend, and in spite of being black-listed in the 1950s went on to become a National Medal of the Arts recipient, Kennedy Center honoree, and inductee in the Rock and Roll Hall of Fame.
At 94-years old, Mr. Seeger is not the powerful folk musician that he once was, but he still has an amazing presence. While I am not a huge fan of his politics, you have to respect his endurance and his talent. The same can be said of the US economy today. While it is hard to respect its current growth rate, the fact is that once we hammer out the danger and the warning, the conditions for recovery are all there.
There are two differing – although complementary – theories behind why recessions happen. The classical model suggests that over time, bad investments in specific economic activities lead to a misallocation of resources and the recession results out of the act of resource reallocation itself. This is often referred to as the Austrian approach. The Keynesian or orthodox approach in modern economics suggests that recessions come about due to a surge in inventories resulting from a lack of demand. Honestly, if you look at both of these theories they are one and the same. The Austrians are saying the businesses are producing useless stuff and the Keynesians are saying that nobody is buying the stuff that businesses are producing. Well, if I am producing useless stuff it stands to reason that nobody would want it!
That said, recessions come about basically due to a lack of demand resulting from businesses not producing stuff that people actually want. This is exactly what happened in 2008 when the housing market collapsed. Falling housing-related assets contributed to a global financial crisis, even as oil and food prices soared. The orthodox economists (who don’t like to admit that mal-investment leads to recessions) called this a balance sheet recession, or in other words, an investment caused by bad investments.
The recession of 2008 and 2009 was long and deep, for two reasons. First, there was a lot of balance sheet that had to be reallocated, and second because the Bush and Obama administrations worked long and hard to ensure that the recession would linger. We are still paying the price for this today with very high long-term unemployment, low levels of business investment and sub-par economic growth.
This very slow recovery is; however, helping to ensure that the next recession (and there are always recessions) will probably not come quickly, and will likely be fairly shallow. This is due to a couple of factors. First, it is unlikely that there is a significant amount of mal-investment occurring, at least in the private sector. Business productivity growth has been slow suggesting that firms are not investing in a lot of new plant and equipment. At the same time we have not seen a spike in inventories, again suggesting that businesses are producing on demand; thereby eliminating the potential for Keynesian inventory buildups. On the consumer side, spending has slightly outstripped incomes (not a good thing) but it has not been rising rapidly, suggesting that there is substantial pent-up demand for automobiles, homes, textiles, vacations, etc. And while I believe that monetary policy has been way too lax, the fact is there is plenty of financial grease in the system to allow entrepreneurs to fund new businesses and to allow consumers to invest in long term assets.
All of these factors are sure signs of future economic growth. The things holding the economy in place mostly have to do with expectations and what Dr. Keynes called animal spirits. Unclear tax and regulatory policies make it difficult to invest and discourage consumer activities like home purchases. The fact that the Mayor of New York could seriously be discussing mandatory scrap food collection suggests just how silly the regulatory environment has become. Multiply this by the fact that most state governments are technically bankrupt due to their pension obligations, and a Federal government that seems to be more interested in making political hay out of various unfortunate occurrences (be they crazed gunmen, weather events, or terrorist attacks) and you see why the environment is making even the boldest entrepreneur shudder.
If I Had A Hammer harkens to the Hammer and Sickle that the communists used to symbolize the unity between agricultural and industrial workers, something Mr. Seeger was very concerned about. But the failure of state communism (or of Detroit for that matter) shows us that the inherent conflict between labor and management is not the economic problem it once was. Too bad that there is no good folk music about the conflict between the state and both labor and capital.