Will We Talk Our Way Into Recession?

It would seem that bad economic news makes for better copy than good news. Unfortunately, this risks feeding the fear of recession, which could in turn contribute to an actual recession.

Fortunately, Internet bloggers are able to challenge the pundits. Here is a good round up by Megan McCardle of 9 times in the past half decade when Paul Krugman has incorrectly predicted a recession. As Glenn Reynolds points out, "eventually, however, he'll be right".

But what will really happen? My take is that since the economy seems to have replaced Iraq as issue of choice for those who want "change", Democrats and the MSM will continue to push the case that we are headed for, or perhaps even already in, a recession. We should factor that drumbeat of pessimism in to any personal or business forecast. There is sufficient uncertainty (sub-prime credit losses, commodity price pressures, slowdown in employment growth) that we should expect at least a slowdown. However, I don't think there is a case for a full recession.

At a mimum, the Fed and the US Treasury are on the case. Can you think of any two economic leaders better than Bernanke and Paulson to steer the economy during uncertain times? A mix of rate cuts and targeted stimulus might just do the trick.

This article in US News & World Report shows the bigger picture: The US has had a 25-year super boom, and is poised to repeat that. But probably most important is the key lessons learned:
1) keep competition high, especially flexible labor markets.
2) keep inflation low (in other words don't push rates down too far!)
3) keep taxes low. . .and by extension, definitely do not increase them!

Even democrats can vote for tax cuts, as happened twice for capital gains taxes - the engine of investment and therefore long-term growth!

Now - what candidates are strong on all three points?

Let me add a Japan angle as well. In the early 90's an increase in the Japan consumption tax (eseentially a sales tax increase from 3% to 5%) basically killed off a fragile economic recovery pushing the economy back into a low growth deflationary regime. Furthermore, Japan still continues to resist moves to increase competition, but wherever competition has been allowed to take root, growth has been high. Related to this, Japan invested billions so-called "pump-priming" economic stimulus measures. Most of that money ended up as some form of pork-barrel spending, that kept the ruling LDP in power and lined the pockets of various domestic industries, further impeding competition. This might have kept things going a bit, but whenever the stimulus stopped, so did the economic benefit, because almost none of that money found its way into investments in economic growth.

More here challenging Senator Shumer's stimulus suggestions. Let's not forget, that government money is by taxation that takes money out of the economy. If you want to put it back, the right way is not to legislate for the IRS to send me a $600 tax rebate check anytime Senator!