An Economic Cleansing

Recessions are part of capitalism. They happen every so often. We’ve had two in the last 25 years. And it looks like we are entering a third one after today’s jobs-loss report.

The unemployment rate went up to 5.1 percent. Non-farm payrolls have fallen for three straight months. Private payrolls have fallen four straight months. And the entrepreneurial small-business-oriented household survey is below its November peak, showing a loss of 678,000 jobs.

These are relatively mild job losses so far. So one can hope this will be a relatively mild recession. But frankly, no one knows for sure.

A lot of Keynesian economists expect the tax rebates will promote recovery. But I doubt it. It’s a demand-side nostrum where only about 20 percent of the checks will be spent. It creates no economic-growth incentives. The 2001 rebates were of little consequence, and it wasn’t until marginal tax rates were cut in 2003 that the economy recovered strong. Even worse, Papa Bush raised taxes in 1991, which retarded recovery.

As a guess, the recession began in November or December. The stock market is basically flat today. And with all the pessimism out there, investors may have already discounted the economic downturn, with the market reaching a low on January 22. It’s up about 4 percent since then, which may mean shareholders are anticipating a new economic rebound in the second half of this year.

Recessions are therapeutic. They cleanse excess from the economy. Think about excessive risk speculation, leverage, and housing. Recessions are curative: They restore balance and create the foundation for the next recovery. Despite the housing and credit problem and the sub-prime virus, banks are still lending to businesses. So we don’t have a genuine credit crunch across the board. That is very good.

On the other hand, domestic corporate profits are down 20 percent from their peaks of late 2006. Since profits are the mother’s milk of stocks, businesses, and the economy, we will need to see profit improvement before the recovery-turn can be called.

How this recession affects the presidential race remains to be seen. Hill-Bama are calling for big-government spending and trade-protection--exactly the wrong medicine. Oh, and did I say tax hikes? Just what the doctor didn’t order. If government wants to play a role, economic policymakers should reduce the corporate tax rate to generate more profits, more jobs, and higher real wages. That would reignite the economy. Home prices and sales should be driven by corrective market forces.

Meanwhile, the U.S. dollar, which some are now calling the U.S. peso, should be appreciated in order to curb inflation. Inflation is the biggest economy-killer of all. Whether Sen. McCain will adopt Reagan-style growth policy to lower taxes and curb inflation remains to be seen.