There are a three elements to economic recovery: people must need to buy things, they must have the money to buy them, and they must be believe that that the future is worth investing in. Every economic downturn leads to people postponing purchases of new cars, new homes, and new consumer goods. After a while, we expect people to be compelled to catch up with purchases; the old car cannot be fixed and must be replaced, and so forth. What’s remarkable about the current poor economy is how little of the automatic bounce back we’ve seen. We look to the factors of money and confidence to explain the lack of recovery.

Money

Politicians see to agree that pumping money into the economy through government action is the main way to “prime the pump” of recovery. The idea is that if people have more money, they’ll use it to buy all those things they’ve been postponing. Democrats want to provide the extra money through government jobs, public works projects, and welfare payments, and they will go along with middle and lower class tax cuts. Republicans prefer across-the-board tax cuts. Republicans and Democrats both like spending freshly-created money to keep interest rates low. There are a few ornery Republicans who don’t like printing new money, but there are not enough of them to count.

The American economy now has plenty of spare money, but the economy is nonetheless stagnant. The Stimulus dumped nearly a trillion dollars into government jobs and tax cuts. A third of the Stimulus went to tax cuts. Some good was achieved, but the economy did not rocket skyward. It’s stuck not much above the launch tower, and it seems ready to topple.

The days of wildly irresponsible lending are over, but interest rates remain extremely low and there are plenty of responsible people who have good credit. They are not using it. Most telling is investors with big money are keeping it reserve. There are more than $2.6 trillion dollars sitting in U.S. cash accounts awaiting opportunities to invest. Corporate cash reserves just hit a record of over $2 trillion. Corporations have more than $1 trillion of cash kept overseas, in part because it would be heavily taxes if repatriated, but also to exploit growth opportunities outside the US.

Democrats argue that the Stimulus was too small to achieve its purpose. They say it should have been spending on the scale that FDR used to cure the Great Depression. Obama should “go big.” they say. The problem with that analysis is that government spending did not cure the Depression. Hoover increased spending by 50% without much result. FDR spent every penny possible, but unemployment stayed at sixteen percent until the start of World War II. FDR’s Treasury Secretary Henry Morganthau said, “We have tried spending money. We are spending more money than we have ever spent before and it does not work.”

Hope

World War II ended the Depression, with a great boom following the War. One reading of that is prior to the War, not every possibly penny was spent by Government. The revised story is that new horizons of Government spending were achieved during the War, and that did the trick.

Consider where the war spending went. Stimulus theory is that the government puts money into people’s pockets and they spend it to buy things. The money then recycles in the economy to produce a growing economy. The War put money into explosives that were shipped one way to foreign lands. The citizens were subjected to rationing, and they bought war bonds with their limited incomes. There was no stimulus cycle of government money being circulated by consumer spending.

The War did increase pent up demand. People wanted cars, home, and long-missing luxuries.

Now we get to the psychology of a bright future. That’s what brought the boom after the War. The path forward was clear. One might call it “hope and change,” although that phrase has not been used in the context of capitalism of late. FDR recognized the problem with his declaration “We have nothing to fear but fear itself.” Apparently a future of government dependence did not come across as an optimistic one. That’s the problem now as well.

Private industry labors under ten new government regulations a day, with 4000 more in the pipeline ahead. America has enormous energy resources. That would allow energy independence and profitable exports. Government has made that off limits and instead insisted on wildly uneconomic green energy. Looming debts promise to crush the economy. The President talks of higher taxes.

What’s missing is hope of escape from a grim economic future. That lies in exploiting energy resources, reducing government regulation, fixing tax rates, and cutting entitlements to resolve future deficit worries. Maybe we’ll try that next year.