Editor's note: A version of this article first appeared at Forbes.com.
In light of claims that we've been in an economic recovery since late 2009, news such as the unemployment rate bumping up to 8.3 percent is disconcerting. Our so-called "recovery " is slower than Japan's during its Lost Decade. In response, many are calling for even more government largess to promote prosperity, yet they conveniently ignore the magnitude of our attempts thus far. Such thinking will keep us stuck in the mire. Allow me to tell you why we can't hitchhike our way to recovery:
Since the beginning of the recession, the Federal Reserve increased the money supply over 64 percent - by $3.4 trillion. Annual federal government spending increased by over $875 billion or 32 percent. Our national debt increased $5.8 trillion from 2007 through 2011.
These stimulus efforts have provided little in the way of sustainable economic progress. Initially things looked superficially promising. Nominal and real GDP both recovered, and at an annual rate of 4 percent as recently as late 2011. The unemployment rate fell from its peak of 10 percent in October 2010. Alas, such happy movements have stalled of late.
A full three years into the so-called recovery, official unemployment remains stuck above 8 percent. The employment situation is not even as good as the official rate indicates. Monthly job creation during the second quarter of 2012 averaged only 75,000 per month - less than half of what it was a year ago. The average duration of unemployment has been fluctuating around 40 weeks since last March. Of those unemployed, 40 percent have been without work for at least 27 weeks - one-tenth of a percent less than where it stood this January. The unemployment rate would be much higher had not the labor force participation rate been at a 30-year low.
The problem is that any sustainable improvement in employment must be predicated on private productive activity, because labor demand is directly related to the value workers help to produce. Private business activity has improved since 2009; however we have yet to return to where we were before the crash. Net domestic private business investment, the amount of investment over and above what is necessary merely to maintain our current stock of capital, peaked in the third quarter of 2007 and began the downhill slide into the Great Recession. It went negative, meaning we were consuming capital during all of 2009, but it has been continually positive since. Despite recent upticks, however, net investment is still 32 percent below its pre-recession peak three years after recovery was declared.
The more recent the data, the worse the news.
For the past two months, the ISM manufacturing composite index has indicated declines in industrial production. Manufacturing had not decreased for two successive months since 2009, but June's ISM survey of heavy industry revealed the largest single monthly decline since 2001.
This should teach us we cannot pave the road to prosperity with monetary inflation - by increasing the money supply out of thin air like we've been doing - and government spending. That some people improve their financial situation as recipients of government expenditure is true enough, but any improvement of the economic situation that is predicated on government spending is a temporary respite at best. Sustaining a higher standard of living through statist means requires ever increasing government spending.
This is a problem because increased government spending requires funding through increased taxation, borrowing, or monetary inflation. Increased taxes consume capital by decreasing taxpayers' ability and incentive to save and invest. Government borrowing from the non-bank public distorts investment by taking scarce factors of production out private entrepreneurial hands and puts them in inefficient bureaucratic hands. Monetary inflation via credit expansion further punishes savers by debasing the dollar and also stimulates capital malinvestment via artificially low interest rates. Unsustainable investments look profitable, when they really are not, so the structure of production is distorted against the desires of voluntary savers. Once the governmental gravy train slows down, bad investments are recognized for what they are and must be liquidated. Bankruptcies occur, and jobs are lost. The economic statistics begin to reveal more reality and less make-believe.
True recovery requires a free economy that encourages the development of the market division of labor, saving and the accumulation of capital, and a market price system free of manipulation that allows entrepreneurs to innovate and wisely invest resources. We cannot hitchhike to prosperity on the back of the Federal Reserve or the U.S. Treasury.
Dr. Shawn Ritenour is a professor of economics at Grove City College, contributor to The Center for Vision & Values , and author of "Foundations of Economics: A Christian View.