The Corner

Lost Decade? Here We Come!

“2.4 percent annual growth? Just kidding!” That’s what the U.S. Department of Commerce effectively said when it reported today that second-quarter 2010 growth was really just 1.6 percent. Leaving aside the extraordinary size of the downward adjustment — one-third lower than initial estimates from last month — these numbers do not bode well for the U.S. economy.

While growth was still positive, its rate is downright anemic in the wake of such a steep recession. Moreover, estimates of consumer spending were adjusted upward, showing just how weak the Keynesian concept of demand-led growth, boosted by government spending, really is.

Ultimately, the U.S. economy needs a major supply-side adjustment to bring investment in line with real consumer demand, not the smoke-and-mirrors kind promoted by federal largesse. The commercial real-estate market needs to sort itself out before meaningful, growth-inducing lending can occur, but with the economy in such disarray, many banks still don’t know how to value the  real-estate assets on their books.

It hasn’t helped that government pump-priming through distortionary policies such as Cash for Clunkers, home-ownership tax credits, and other programs geared toward propping up any and all types of government spending (no matter how poorly targeted) have made it virtually impossible for businesses to know what consumers really want and value. Fortunately, the government is just about out of gimmicks. Now, perhaps, the supply side of the economy can finally get to the ugly task of righting itself.

The best thing the federal government can do is revert to a stable, predictable, and consistent monetary policy (remember the Taylor Rule?), hold the line on government spending, and get out of the way of businesses that are focused on innovation and job creation.

— Samuel R. Staley is the Robert W. Galvin Fellow and director of urban and land-use policy at the Reason Foundation.

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