Could another “capital strike” sink U.S. economy?

Joseph Vanden Plas, Senior IB Editor, is our strongest voice on the political front, and he writes on a wide variety of subjects, most of which are directly pertinent to economic development circles. He holds public officials accountable, and explains the larger playing field when a special interest group is involved.

When I first heard the U.S. economy created 430,000 new jobs in May, I thought “bingo!” The recovery is really underway and, hopefully, there is nothing anyone can do to stop it.

Then, the vinegar was poured. The vast majority of those new jobs, all but 41,000, were temporary Census jobs that won’t exist a few months from now.

Buzz kill #1.

Alright, I rationalized, that might simply be a function of one of the worst Mays since the passing of Sinatra 12 years ago. Nobody expected this recovery to be a smooth ride, and the news has been so bad — European economic crisis, winds of war in the Korean Peninsula, and bubbling crude in the Gulf of Mexico — that it could put a damper on anything.

So maybe while we’re shot down in May, we’ll be back on top in June.

Then I come across an observation by columnist Michael Barone, who raised the possibility of a “capital strike” in which the monied folks basically sit on the sidelines, refusing to invest in new businesses and jobs as a way to protest higher taxes and more intrusive government.

Buzz kill #2.

Barone contends that this is exactly what happened in the 1930s following the enactment of the New Deal, and it might well be happening again. I think it’s too early to make that call, especially with the aforementioned events overseas serving to roil our stock markets and the frustration and fear over the out-of-control oil spill. I’ve had a local CPA that I really respect, Gordon Meicher, tell me the economy might yet be saved by all that idle money that has to be burning holes in people’s pockets.

But something in Barone’s piece struck a nerve. I had long forgotten the misinformation that I was subjected to about the New Deal while in school. Namely, I was taught that this series of government programs offered hope to a destitute population (true) and got us out of the Great Depression (false). Only years later did I learn that unemployment, while lower than when Franklin Roosevelt took office, was still unacceptably high in the late 1930s, and that the productive capacity we needed during World War II actually got us past the Depression.

Before that unpleasant reminder, my sense of optimism about the direction of the economy was real, but it had very little to do with anything the government has done. Rather, it was based on the resiliency of the American business community, as well as recent metrics suggesting that we’d turned a corner. For example, a recent Robert Half survey indicated that 85% of executive respondents expressed confidence in the third-quarter growth prospects for their companies, up from 82% in the second quarter; meanwhile, a growing percentage indicated they planned to increase the number of full-time employees in professional occupations.

In addition, U.S. Bank’s weekly market and economic update for May 31, 2010 carried mixed news about the markets, but encouraging news about durable goods orders (up 2.9%), consumer income (up 0.4%), and consumer confidence (up more than expected in May). All were likely responses to positive hiring news in March and April.

Instead, we could be staring at a jobless recovery, which is to say no real recovery at all. And with Congress preparing to increase taxes on small businesses, capital gains, and investment dividends — all to soak the rich — the possibility of another capital strike is worth watching because class warfare politics, like any form of divisive politics, serves no useful purpose in the long run.

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