The Reality of Economic Green Shoots

Well the stock market is up, Goldman Sachs is issuing record bonuses, and unemployment figures are lessening their decline. This is all good news. But we are not out of the woods.

A number of analysts have noted some striking comparisons to the early 1930s when output increased slightly only to plunge yet again. I think the comparisons might be a little unfair to current policymakers as they have done a lot of work to counteract the effects. With that said, I think there are a number of big weeds that threaten to choke any green shoots emerging elsewhere:
(1) State finances - States are struggling, big time. They simply don't have the leverage to borrow their way out of this and so must take anti-Keynesian actions like cutting budgets and raising taxes. Already their actions are reducing the impact of federal spending (or alternatively, federal spending is reducing the worst of the state budgetary crisis). Rising taxes are stifling in an environment of uncertainty, particularly when they are so ad hoc and without any long-term vision. States still have a long way to go.
(2) National government finances - Here in Europe, things are not so pretty either. Latvia is getting bailed out only after taking drastic cuts to its budget. France, Germany, Ireland, Spain and others are running record deficits while most policymakers are laughing at the EU's rule of 3% deficits or less. The difference here though is there is no federal government that can engage in large Keynesian spending. Asia is not too much better, though China has done more to counteract this crisis than perhaps any other country. But again, I reiterate my warning that sovereign debt sales are in for a difficult summer and fall.
(3) Policy complacency - It seems that here in the US, we are nearly reaching the end of our tolerance with change and the future is uncertain. The suddenly acrimonious debate over health care and financial regulation has perhaps revealed the limits of how far we are willing to go to change our economic infrastructure. I suspect that businesses are looking for some stability in the policy realm before they go forward with long-term investments, and right now there is no certainty. Any vision of Obama or others is also clouded at the moment by bizarre events, like the death of flies, King Jong-il and his missiles, and the unrest in the Middle East (more on that later). Perhaps we just need to wait out the summer before things can really take hold again.

I do sincerely hope that this financial crisis compels us to seriously examine public policy choices. If we just patch things over, we will have to wait for the next period of economic uncertainty. But if we make real choices now (whatever they are), I believe optimism and economic growth will return.