onetime2

I don’t really believe there was ever a commitment to fiscal responsibility by either administration. The surpluses we saw for a few years were due to an incredibly accelerated economy and the politicians were caught off guard by the extra money they had. The debate over what they should spend the surplus on showed that there wasn’t a wide spread commitment to pay down debt or be fiscally responsible. Additionally, the economy was growing before and began its fall during this supposed era of “fiscal responsibility”. But we could debate this subject all day and not get anywhere.

Your second comment is far more thought provoking. You are absolutely right that it wasn’t a recession and wasn’t even a period of non-growth. As far as what the economy is capable of, it is capable of considerably more growth. But with this fast growth comes far greater risks. It’s not unlike driving a car at 100 mph. You may be capable of doing it in short spurts but you’re not likely to be able to sustain it at that level, and even if you could, a bump in the road could cause far more damage at that speed than it would at 55 mph.

There were several drivers within the period of strong growth. Increased productivity, a strong stock market, low interest rates, increased home values, and low inflation combined to create high consumer confidence and impressive levels of consumer spending. Within these drivers we have seen some very good and some very worrisome developments and it was the relatively calm reaction of consumers and investors to these events that kept us from plunging into recession.

Specifically,

The stock market took a slight tumble. Given the increased consumer exposure (everyone from cab drivers to CEOs have ties to the stock market in the form of direct investing, 401ks, pension funds, etc) to events in the stock market, this drop could have precipitated a cut in consumer spending.

Corporate accounting scandals. Had investors/consumers looked at these as commonplace rather than isolated incidents it may have convinced them that their retirement savings were at risk. This probably would have led to pulling money from stocks and cutting back on consumer spending.

Low interest rates allowed consumers to manage their ever-growing debt levels. Had these rates gone up, the cost of servicing these debts (their monthly payments) would have gone up and cut into their spending.

High home prices combined with the above-mentioned low interest rates have allowed homeowners (and that’s a huge portion of the US population with around 2/3 of households owning their own home) to refinance. This has either allowed them to cut their monthly mortgage payments or to cash out some equity (or in some cases both) to pay down debt or go on spending sprees.

High productivity has allowed companies to keep prices steady (i.e., low inflation) and still make a decent profit.

The consumer/investor has become far more sophisticated than just ten years ago. They have taken to heart the advice of experts that investing in the stock market needs to be done over the long haul. They’ve made pretty good use of refinancings and low interest rates to solidify their financial positions and they haven’t over reacted to bad news.

So, while the economy CAN perform at a higher level than it is, it may not be what we should be shooting for. There’s a pretty good chance that this 100 ft economic drop has saved us from a 1000 ft tumble down the road. It’s also quite possible that this slow down will allow our economy to grow for another ten years without hitting a recession. Of course, we’re far from being out of the woods. More corporate scandals, the bottom dropping out of the housing market, widespread layoffs, or anything that causes the consumer to stop spending will push us towards a recession.