The Incredible Shrinking Recovery
May 11, 2011
This column by ACRU General Counsel and Policy Director for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published May 11, 2011 on The American Spectator website.
There was President Obama at a recent fundraiser telling his star-struck enablers, look at me, after just two and a half years, I got the economy growing again. He didn’t tell them that the pitiful 1.7% annualized real growth rate in the first quarter compares to 7.1% annualized real growth at the same point in President Reagan’s recovery.
Over the first 7 quarters of the Reagan recovery, the economy boomed at a real growth rate of 7.1%. Over the first 7 quarters of the Obama recovery, the economy stumbled along at a real growth rate of 2.8%, less than half as much, less than 40% as much actually.
Dude, Where’s My Recovery?
President Obama and his party-controlled press at the New York Times and the Los Angeles Times would like you to believe that without his Keynesian magic beans, the economy would have just kept spiraling down. But that does not accord with the historical record in America.
As I have previously explained, since World War II (that covers two-thirds of a century now) recessions in America have previously averaged 10 months. The longest previously in the postwar era was 16 months. Those recoveries weren’t due to brilliant bureaucrats in Washington riding to the rescue each time. The economy naturally returns to growth and recovery, driven by incentive, reward, and competition. That is why they call it the business cycle. Like your finger healing from a cut, the economy naturally wants to recover.
Every morning, business men and women all across the country go to work and throw themselves for the day into making their businesses more effective, efficient, competitive, innovative, profitable. Every morning, unemployed workers get up and go look for jobs. Every day, employed workers are alert to better job opportunities elsewhere. This is what has always led to recovery, not Keynesian central planning.
Yet, the labor report for last month showed that 40 months after the last recession started, unemployment was again rising, up to 9%. That marks the longest period with unemployment that high since the Great Depression.
African-American unemployment was up again to 16.1%, Hispanic unemployment up again to nearly 12%, teenage unemployment up again to nearly 25%, black teenage unemployment over 40%. With unemployment continuing at or near those stratospheric levels for over two years now, these groups have been suffering their own Great Depression under President Obama.
Indeed, the U6 unemployment rate, counting those marginally attached to the labor force who have given up looking in the Obama recovery, and those who are stuck in part time unemployment for economic reasons, was reported last month at still nearly 16%.
As economist John Lott explained in his commentary at FoxNews.com on Monday, the Bureau of Labor Statistics (BLS) reports that 7.5 million jobs were lost during the recession. Since the recession was technically declared over, the Bureau’s Household Survey shows another 304,000 jobs have been lost during the supposed “recovery.” Even the more optimistic Establishment Survey reports only 535,000 total jobs created under President Obama’s self-congratulatory “recovery.” At the same point in Reagan’s recovery, 6,573,000 jobs had been created, on its way to a record 20 million new jobs.
The official unemployment rate has fallen from its double digit levels only because so many workers are fleeing the work force altogether in Obama’s economy. Lott explains that 5 million non-workers are considered by the BLS to have dropped out of the work force altogether, and are therefore not even counted in the official unemployment rate. That includes 2 million who have left the work force since August.
Alas, the problem is even worse than these numbers indicate. The jobs created from June, 2009 through April, 2011 have almost all been temporary service jobs. Of the 535,000 new jobs [in the Establishment Survey], 500,000 were temporary jobs. Thus, just a measly 35,000 were permanent jobs. To put it differently, up until this last month, there had been no net increase in permanent jobs during the recovery.
Meanwhile, with prices for food and gasoline in particular soaring, real wages for working people are falling. Last year, the Census Bureau reported that the total number of Americans in poverty was the highest in the 51 years that it has been recording the data. This is proof that the Democrats really do care about the poor. That is why they are creating so many of them.
Historically, the deeper the downturn, the stronger the recovery. Based on the long-term historical record, America should be enjoying the second year of a booming economy by now. But instead of President Reagan’s 7.1% real growth rate over the first 7 quarters of his recovery, President Obama’s stunted recovery has stumbled along at less than 40% as much, with the last quarter down to 1.74% on a yearly basis. While in the Reagan recovery the economy soared past the previous GDP peak after 6 months, under Obamanomics it took over three years just to get back to where we were in December, 2007.
Another Failure of Keynesian Economics
The reason for this pitiful economic performance is that from the beginning President Obama has addressed the economic downturn with Keynesian economics. Indeed, comprehensively following just the opposite of Reaganomics in every detail, he has play-acted as if Reaganomics never happened, or at least as if he was completely unaware of it. This public policy malpractice is why he does not deserve to be re-elected.
President Obama’s first act in office was his nearly $1 trillion stimulus package of wasted government spending and giveaways. That was supposed to stimulate the economy by increasing aggregate demand, under outdated Keynesian thinking rightly left for dead at the end of the 1970s. The reason such Keynesian economics never works is that borrowing a trillion dollars out of the economy to spend that trillion dollars back into the economy doesn’t do anything to increase the economy overall on net. I have been arguing in this space and elsewhere for more than two years that Obama’s Keynesian economics would fail for precisely this reason.
President Obama likes to pretend that a third of his trillion dollar stimulus actually involved tax cuts. But those “tax cuts” all involved temporary tax credits, which are economically no different from increased government spending. Indeed, a majority of the Obama “tax cuts” were “refundable” income tax credits, which involve sending a government check to people who do not even pay income taxes, economically indistinguishable from increased government spending. That is why even the federal government’s own official bean counters account for such refundable credits in the federal budget as spending rather than tax cuts.
Real tax cuts that promote economic growth involve reductions in tax rates, as under Reaganomics. President Reagan reduced the top tax rate from 70% when he first entered office all the way down to 28% by the time he left, with only one other rate of 15%, which applied to the middle class. That was the central factor in producing the historic 25 year Reagan economic boom.
Moreover, just the opposite of Obama’s wasted trillion dollar stimulus, President Reagan came into office with his much vilified at the time Reagan budget cuts. That involved a $31 billion cut in spending in 1981, close to 5% of the federal budget then, or the equivalent of about $175 billion in spending cuts for the year today. In constant dollars, non-defense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. Moreover, in
constant dollars, this non-defense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms! Even with the Reagan defense buildup, which won the Cold War without firing a shot, in Margaret Thatcher’s famous phrase, total Federal spending declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989. That’s a real reduction in the size of government relative to the economy of 10%.
President Obama’s monetary policies are just the opposite of Reagan’s as well. With the full backing, indeed urging, of Obama, Fed Chairman Ben Bernanke has returned precisely to the discretionary Keynesian monetary policies of the 1970s that produced the roaring inflation of that time. Nicknamed “Helicopter Ben” because his monetary policies are the equivalent of dropping dollars from helicopters, his policy is to run the monetary printing presses until the economy recovers. But the central lesson of the life’s work of Nobel Prize winner Milton Friedman is that such discretionary monetary policy can only create inflation, not real growth. Consequently, instead of taming a historic inflation, Obama and Bernanke are re-creating one, while failing to produce a real recovery.
The Coming Crash of 2013
What too many commentators have failed to recognize is that President Obama’s tax rate policy is also the mirror opposite of Reagan’s. Already scheduled in current law for 2013 is the expiration of the Bush tax cuts, which Mr. Obama recently again vowed never to renew for single workers making over $200,000 a year, and couples making over $250,000, whom he disparages as “millionaires and billionaires.” Also scheduled to go into effect in 2013 under current law are all the tax increases of Obamacare. Together, these job-killing tax policies would result in a sharp increase in the tax rates on the nation’s small businesses, job creators, and investors for virtually every major federal tax.
The top income tax rate would increase by nearly 20%, counting the slashed income tax deductions Mr. Obama already proposed in his February budget. The capital gains tax rate would increase by nearly 60%, counting the new Obamacare taxes on investment income. The total tax rate on corporate dividends would increase by three times altogether. The Medicare payroll tax rate would also increase by 62% for these taxpayers. The Death tax would be restored with a 55% top rate.
That adds up to a top federal income tax rate of 44.8% on wage income. Counting state income taxes, the top marginal tax rate in Obama’s new Amerika would be over 50%.
But that is not all. What the President proposed in his April 13 national budget speech was an additional tax increase on these job creators of $1 trillion! And even then he was not done raising taxes, proposing in addition an automatic tax increase trigger that would raise taxes still further in 2014 if “our debt is not projected to fall as a share of the economy.”
In addition, American business currently suffers virtually the highest business tax rate in the industrialized world at nearly 40%, counting state corporate rates on average. Even in the left-leaning European Union, the corporate tax rate has been reduced from 38% to 24% over the last 15 years. In Canada, where the corporate tax rate is on its way down to 15%, voters last week voted for a dominant conservative majority in the Parliament. Both China and India enjoy lower corporate tax rates as well, leaving American business uncompetitive in the world. Yet, President Obama has remained oblivious to the job-killing result for America’s working people. Indeed, he proposed in his 2012 budget still more tax increases on American businesses, which are already built into the nevertheless still disastrous projections of deficits and debt in that budget.
But this is still not all. The President promises even higher prices for oil, gasoline, coal, natural gas, and electricity, with his EPA implementing by administrative dictate outside the democratic process the cap and trade tax policy. As the President himself has said, under these policies “the cost of electricity will necessarily skyrocket.” That is effectively still another, multitrillion dollar tax increase on the economy. While Reagan used to say that his energy policy was to “unleash the private sector,” Obama’s energy policy can be described as precisely to leash the private sector in service to Obama’s central planning “green energy” dictates.
Obama told us in the 2008 campaign that his tax policy was just to return to the Clinton era tax rates, and he and his propagandists still repeat this outdated talking point today. But President Obama’s proposed tax policies would now take us way beyond that, towards Swedish socialist tax rates.
So doggedly following just precisely the opposite of Reaganomics in every detail will ultimately produce just precisely the opposite results. Just as the Reagan economic boom did not take off until the Kemp-Roth tax rate cuts were fully phased in, the full effect of Obamanomics will not be seen until President Obama’s 2013 tax rate tornado is fully phased in. If those comprehensive tax rate increases are not stopped, instead of the Reagan economic boom, the result in 2013 will inevitably be another recession. Moreover, as rising inflation forces the Fed to reverse its wildly loose, bordello-style monetary policy, the contractionary effect of that will further contribute to the downturn, just like in the pre-Reagan 1970s.
With President Obama’s 2012 budget projecting this year’s deficit already at $1.65 trillion, how high will the deficit go when the economy is thrust back into another recession? Will world financial markets finance an American deficit approaching $3 trillion? Or will we then have finally reached the likely result of Obama’s Grecian formula economics, the bankruptcy of America?
The European Union fashioned a trillion Euro bailout of Greece that still may not work. But who will bail out America?
Only the American people can, by voting in a new President next year, who will abruptly terminate Obama’s trashing of America.