On Government Life Support

Good news from America. The economy grew more than expected in the second quarter. The recession has ended for the world’s largest economy, at least unofficially, and this is a good six months after many had predicted a crisis comeback. That is first and foremost a success for President Obama. His courageous decision to initiate a gigantic economic stimulus program and accept record deficits shortly after taking office paid off. Without that program, the U.S. economy would presumably be in even worse shape now with all the attendant ramifications for the global economy.

But there’s also bad news: the recovery is anything but sustainable; the U.S. economy may be in recovery but the patient is still hooked to the government’s IV drip.

Above all, three figures show just how weak the recovery is: first, investment declined again during the third quarter showing that companies aren’t yet convinced of a brighter future. Second, unemployment continues to rise and people who fear for their jobs won’t continue spending. And third, the rate of savings in the United States has begun to decline once again. It was the low savings rate during the first half of this decade that was one of the causes of the crisis in the first place.

It’s imperative that U.S. households save more in the future, which will put a damper on economic growth. It’s therefore impossible to say when the Fed and the government will be able to begin taking the American economy off life support.