DELANY JR.: Recession is a terrible thing for president to exploit

ANALYSIS/OPINION:

When reading commentaries about the 2008-09 recession, not surprisingly, much of the focus is on the negative aspects.

Unemployment reached 8.1 percent in February and could climb to 10 percent before the recession ends, the Wall Street Journal reported Saturday. One out of nine homeowners in America are late or in default on their mortgage payments, the same newspaper reported Thursday.

The crisis of confidence in our financial institutions has led to seizing of business and consumer credit. Americans have become victims of Ponzi scheme theft on scales unimaginable a mere six months ago. The list of the recession´s negative effects on America seems infinite. Undoubtedly, these issues reflect real hardship faced by many Americans. However, let’s flip the recession coin and take a closer examination.

The American economy continues to make a structural shift from a mid-20th-century industrial economy to a 21st-century digital information economy. During this period, the U.S. economy also evolved from a primarily domestic economy to a full participant in a global economy. “The World is Flat,” a book by Thomas L. Friedman, metaphorically describes these structural shifts in the U.S. and world economy.

No one can argue the long-term benefits of these shifts: better and cheaper products, improved communications, improved technology and a general improvement in the standard of living for most Americans. Let us be clear that these improvements come with a heavy price. The economy must reallocate capital and labor from the old economy to the new economy. Joseph Schumpeter best described how recessions contribute to the structural evolution of an economy as “creative destruction” in his classical book “Capitalism, Socialism and Democracy.”

When the economy is strong, marginally productive manufacturing facilities, retail outlets and financial services continue to function because they contribute profits to a business´s bottom line by providing goods and services to consumers. In tougher times, the least productive of these operations become unprofitable and redundant.

The classic textbook example of this phenomenon is the buggy-whip manufacturer at the turn of the 20th century. When automobiles were replacing horses and buggies as the primary means of transportation, who needed buggy whips? At the turn of the 21st century, is there a place for unprofitable automobile companies that are being abandoned by customers who want cars with better fuel efficiency, quality and styling at a lower price than these companies provide? Is there a place for the manufacturer of analog TVs in today’s market? Does the economy really need Circuit City stores when consumers abandoned them for Best Buy? The market will decide.

Most people make hard decisions only when forced to do so. Business people and politicians are no different. In a recession, business people are forced to make tough decisions when they are losing money.

If there are no markets for their products, they must downsize or close their factories that are losing money, or they go out of business. Employers are distraught when faced with the decision to terminate competent and fiercely loyal employees, but the marketplace leaves them no choice if the survival of the business is at stake. The recession always forces these decisions. In the long run, the economy is better off because capital and human resources are no longer wasted on obsolete buggy-whip manufacturing but are allocated to more productive new technology.

The government needs to promote business activity and employment during this recession by implementing incentive programs that encourage the private sector to invest in the successful businesses of the 21st century. These successful businesses will create value-added jobs.

The simplest method to promote these incentives is to reduce the marginal income-tax rate on all taxpayers. Among the most destructive fiscal policies that the government can implement during a recession is to increase taxes on successful and productive taxpayers. That discourages the business community from investing and creating jobs. Nor should the government subsidize the moribund automobile industry; it should allow the bankruptcy process take its course.

President Obama has inherited a recession that is part of the normal business cycle of the American economy. Recessions mean that businesses and politicians must make tough decisions.

The president has proposed spending policies to prop up failed sectors of the economy and to direct the allocation of resources of the economy into the public sector. This tactic is akin to using your finger to plug a cracking dike. He should have proposed policies that provide incentives to the private sector of the economy to create a recovery.

Unfortunately, the president’s real agenda appears to be the creation of a European-style welfare state in America. The recession provides great cover for implementing the president’s real agenda.

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