Michael Hlinka: Why we could be headed for a double-dip recession
- May 25, 2010 2:22 PM |
- By Michael Hlinka
Money Talks is a business column from CBC radio.
By Michael Hlinka, CBC business columnist:
Ask me what's the funniest TV show of all time and I would say Seinfeld. And maybe the best moment in the whole series was when George is at a funeral wake. He's getting something to eat, when he starts dipping his potato chips and he's accused of "double-dipping." A brouhaha ensues... it's hilarious! So whenever I come across the phrase "double-dip," that scene immediately pops into mind.
However, when economists were talking about "double-dip" this past weekend, it didn't have anything to do with entertainment.
No, it was all about the legitimate fear that the global economy might once again be heading for another slowdown ... the so-called double-dip recession.
That's not how it's supposed to work. Theory tells us that recessions should be brief anomalies. Slowdowns would be part of the normal business cycle, but then the Central Banks would lower interest rates. Governments would run deficits for a short period of time, and this would stimulate spending and investment. Then the imbalances that led to the slowdown would be corrected quickly and the economy would start growing again. Interest rates would rise to more normal levels. Governments would re-balance budgets. And the economy would do what it's supposed to do - expand, creating jobs along the way - and the universe would unfold as it should.
But it's not working like that this time around.
Let's use the United States as a symbol for the global economy - and it's a pretty good one, in that it represents about a quarter of world GDP. Interest rates are essentially zero. The federal government will run a deficit of $1.4 trillion US this year. On a per capita basis, that's around $4,700 for each man, woman, and child.
This is monetary and fiscal stimulus that is completely unprecedented and what is there to show for it? Jobless claims that are increasing - that's what the latest numbers from April said. The official U.S. unemployment rate is just under 10 per cent and more serious estimates put it a lot higher than that ... one out of seven Americans is simply not involved in creating goods and services of real value at this moment in time.
Something's wrong with this picture.
And it's not the free enterprise system, because what characterizes this era is a lack of freedom and a lack of enterprise. No, the problem we have - and we're seeing it from Greece to Spain to our own backyard - is that government is too big and bloated.
On top of that, the benefit programs that people expect as a birthright are unaffordable and unsustainable.
No-one wants to say this out loud, but the social safety net provides too many disincentives to do necessary, but low-value added work because you're often further ahead staying at home and watching TV. And, hey, you never know ... instead of going out there and getting your hands dirty, you might just be able to stay in and catch a really good Seinfeld re-run.
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