Tuesday, October 28, 2008

Economic regeneration

In the face of economic crisis often times the smartest response is simply doing nothing. This is often, however, the most difficult response, as we see in the current economic environment in which politicians are clamoring to often up their own supposed solution. Think of economic crisis as a forest fire. Forest fires are often times natural events. Lightning strikes a parched area of forest and pretty soon you have a massive conflagration on your hands. Here's a typical result:

With time, however, regeneration occurs:

So too it is with the economy. Just as forests do not require armies of government workers to run around replanting trees, so too the economy does not require legions from Washington DC to restore order, for the market is remarkably self-correcting. For example, let's look at the housing market, upon which many people cast blame for much of our current travails. As prices have slumped, thus making housing more affordable, more people have begun entering the market:
The pace of new home sales in the US rose by 2.7 per cent last month – a much better figure than forecast by economists - as low prices fostered a flurry of activity in the stricken US housing market amid an intensifying financial crisis.

New home sales rose to an annualised rate of 464,000 units after dropping by a steep 12.3 per cent in August, the US commerce department said on Monday. The inventory of unsold homes also dropped, from 11.4 months’ supply in August to 10.4 months’ supply last month. The median sale price for a new home fell to $218,400, its lowest level in four years.
As George Will notes, amidst the bad news are the seeds of future good news:
"We are," says economist Allen Sinai, "going through a quantum downward shift in consumer spending." This, too, is partly good news. Consumer confidence plunged more in October than in any month since measurement of it began in 1978. Personal consumption is 70 percent of economic activity, so there never seems to be a good time for retrenchment. But if not now, when?

Does anyone doubt that Americans consume too much and save too little? In the three decades prior to the 1990s, Americans saved nine cents of every after-tax dollar. Since then, they have saved 3.5 cents of each dollar; in each of the last three years they have saved less than a penny of each dollar. They kept their consumption rising not only by scanting saving but also by supplementing credit-card debt with home-equity loans.

Happily, all across America, state lotteries—government mechanisms for fleecing the gullible for the benefit of governments—are suffering because people with shrinking disposable income are dispensing with those instant "scratch" tickets. If you are among the millions who own Wal-Mart stock—either directly or through this or that fund—you are benefiting, as that company is, from the new frugality.
If government wants to assist this process, it can best do so by getting out of the way.

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