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Economy will recover — but it won’t be the same

Dear Mr. Berko: Can you tell me why the economy can’t get back on its feet and why we seem to have had more economic downturns in the past 10 years than we had in the past 25? Has capitalism failed us? Is capitalism now the enemy? — S.K., Gainesville, Fla.

Dear S.K.: There are five types of stimuli the government uses to repair a sick economy:

(1) Monetary: The government floods the economy with newly minted money to create and save jobs. This fresh currency is supposed to work like kindling that, when properly arranged, ignites a communal fire.

(2) Fiscal policy: Reduces payroll taxes to jump-start the economy. It also lowers business taxes to increase corporate profits, encourage expansion and reduce personal taxes, giving the consumer more money to spend, which increases demand and therefore employment.

(3) Lower interest rates: Reduces expansion and production costs for business and makes it less costly for consumers to purchase homes, appliances, autos, etc. This increases demand, which in turn creates more employment.

(4) Sex, lies and video tapes: In order to improve consumer and business confidence, the administration fudges the data that measure employment, consumer demand, home prices, GDP and inflation and conjures an overly optimistic spin on government programs to stimulate the economy.

And, finally:

(5) Some combination of all of the above.

Now the government is almost out of kindling. Tax incentives aren’t working because too many people are out of work or underemployed — 18.6 percent — to make it effective. Be mindful that 71 percent of our GDP is consumer-driven.

Lower interest rates haven’t helped much, and banks are reluctant to lend. And rates can’t move lower unless banks are willing to pay borrowers an annual fee to borrow money from them. Meanwhile, low interest rates and controlling the news aren’t working.

All these things worked well in the past, but as the economy continued to grow they worked less effectively each time they were used, so our economic downturns grew more frequent and serious. And it’s going to get worse because those remedies have lost their punch.

We must understand that our economy is a living, breathing organism and responds to remedies just like a human body. Imagine a doctor prescribing a regimen for antibiotics to fight a bacterial infection. It works well the first, second and third time, but it soon takes a little longer to work because the bacteria develop a resistance to the antibiotics. And to make matters worse, the infection seems to return with increasing regularity. After a while, those antibiotics don’t work at all. So the only cure is to allow the body — or the economy — to use its natural defense mechanism to fight the infection.

But economists can’t get it through their pea brains that a massive stimulus is like an overprotective mother who won’t let her kid grow up. The economy needs room to sputter and self-correct without running to Mommy to wipe its nose and kiss its bruises every time the kid gets hurt.

Capitalism isn’t the enemy. Pogo said it best: “We have met the enemy and he is us!”

Be sure that the economy will be recovered. But it won’t return to the hubris of a few years back when $150,000 homes sold for $400,000, banks were handing out loans like samples of cookies, unemployment was 4.4 percent, college grads had exciting job opportunities waiting for them and American workers believed they could retire with modestly comfortable pensions.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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