The second-quarter UCLA Anderson Forecast was released this week and the findings highlight the pitiful economic growth of this administration’s policies over the last four years.
In fact, there has been no economic recovery. Growth of real gross domestic product (GDP) – meaning the inflation-adjusted value of goods and services produced – is too small to help the nation climb out of its slump. The figure was 15.4% below a normal growth trend, forecast director Edward Leamer wrote.
“To get back to that 3% trend, we would need 4% growth for 15 years, or 5% growth for eight years, or 6% growth for five years, not the disappointing twos and threes we have been racking up recently,” he said.
“It’s not a recovery. It’s not even normal growth. It’s bad,” he wrote.
For those of us who don’t worship the Keynesian deity of economic fantasy – Paul Krugman – this doesn’t come as a shock.
The typical progressive knee jerk reaction to any bad economic news is the usual, “It’s Bush’s fault!” Indeed, like the timeless excuse of blaming obesity on being “big boned” (although bones don’t jiggle), blaming lack of economic growth on a lame duck president who hasn’t been in office for four and a half years still hasn’t grown old in some circles.
Let that be a lesson to you kids out there: If you’re failing to produce any results in whatever job you have, take a page from the president’s playbook and blame your predecessor for as long at it takes. If you’re likeable enough, you can get enough people to believe anything.
The truth is this has been the weakest recovery since the 1930’s. This should come as no surprise since we have been following the same policy prescriptions that resulted in the longest period of economic misery in our nation’s history.
For starters, let’s begin with clarifying (once again) what truly caused the Great Recession. Progressives love to blame it on the Bush tax cuts, war spending, and basically anything else he did while in office. While that makes for great political rhetoric, it’s misleading.
Before the Bush tax cuts, the federal government was bringing in $1.9 trillion in revenue under the Clinton rates in 2000. By 2008, well after the Bush tax cuts were implemented, the federal government was bringing in $2.7 trillion in revenue – a figure not matched again until this year (though still behind the inflation curve: $2.7 trillion in 2008 was worth $2.9 trillion in 2013 dollars). Even when accounting for the eight year inflation curve, we were still bringing in more revenue after the Bush tax cuts due to the economic growth that occurred over that same time period – including job growth that expanded the base of taxpayers paying into the system (unemployment fell to below 5% under Bush).
While Bush was no fiscal conservative when it came to federal spending, his administration kept spending to its historic rate of GDP – 20% – right up until the bank and auto bailouts of 2008. He didn’t blow up the deficit anywhere near where the Obama administration has, and while he added $4.9 trillion in debt over eight years (and average of $612.5 billion a year), his successor has added $6.25 trillion in debt in just 4.5 years (and average of about $1.4 trillion a year – more than double Bush’s spending).
What truly caused the Great Recession of 2008 was the housing market crash that occurred as a result of the affordable housing crusade through Fannie Mae and Freddie Mac. It was government intervention which turned a thriving housing industry into a swamp, as a study from the National Bureau of Economic Research concluded after painstakingly sorting through the failed home loans that caused the housing market collapse and identifying an overwhelming connection between them and Community Reinvestment Act mortgages. Both the Bush and Clinton administrations share blame for that debacle.
Now let’s look at two of the most successful administrations who grew their way out of economic recessions and find out what they have in common.
The Depression of 1920–21 was an extremely sharp deflationary recession, shortly after the end of World War I, lasting from January 1920 to July 1921. As Thomas E. Woods, Jr. of the Mises Institute identifies:
“The economic situation in 1920 was grim. By that year unemployment had jumped from 4% to nearly 12%, and GNP declined 17%. No wonder, then, that Secretary of Commerce Herbert Hoover – falsely characterized as a supporter of laissez-faire economics – urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.
“Instead of ‘fiscal stimulus,’ Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.
“The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, ‘Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.’ By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7% and it was only 2.4% by 1923.”
What!? An economic recovery without government intervention? That’s unheard of in today’s universities!
Upon succeeding Harding to the White House, Calvin Coolidge took is a step further and slashed tax rates across the board for all income levels. The top tax rate was cut from 77% down to 25%, which sparked one of the most prosperous economic booms in American history known as “the Roaring Twenties.”
The key lesson is simple: It’s private sector spending that leads to economic growth, investment and job creation – not public sector spending.
One of the only other administrations who understood this economic “miracle” was Ronald Reagan’s. Jimmy Carter came into office on the heels of an economic recession and looked to bigger government, Keynesian economic policies, and relied heavily on Federal Reserve intervention on monetary policy to solve the crisis – including raising government spending, increasing regulatory powers and government control, and keeping the highest bracket income tax rate at 70%. The results ended up being high prices, high unemployment, low confidence (in both consumer spending and business investment), low household net worth, and low GDP growth.
By the time Reagan came into office, unemployment had hit a high of almost 11%. When he left office, it was below 6%. Taking a page from Coolidge’s book, the Reagan administration (along with a Democratic Congress) slashed tax rates across the board, dropping the top bracket income rate from 70% to 28%. He also scaled back the strangulation of government regulations on the private sector. Like in the 1920s, the resulting economic boom led to historic GDP growth as well as job creation which expanded the base of taxpayers.
Progressives may say, “But Obama has lowered the unemployment from 10% to 7.5%.” Here’s the key difference: Obama’s decline in unemployment is due to more people giving up looking for work and switching to welfare in record numbers, including food stamps, Medicaid and disability benefits. Reagan’s decline in unemployment was rooted in more people finding work due to increased opportunity and job creation. The proof? According to IRS data, 85% of Americans were paying income taxes under Reagan. Today, barely 50% are doing so under Obama.
Unlike Harding/Coolidge and more like Bush/Obama, Reagan did ramp up government spending (primarily defense) in an effort to bankrupt and trigger the collapse of the Soviet Union, which worked. He left the subsequent Clinton administration and Republican Congress of the 1990s to slash federal spending during peacetime from 22% of GDP down to 18% (as illustrated in the chart above) – a major decline on a scale not seen since the 1950s and helped balance the budget for the first time in 30 years. It also didn’t affect the economy in any detrimental way. To the contrary, the 1990s continued an economic boom of growth and prosperity throughout the decade.
But like Herbert Hoover and Franklin Roosevelt before him, Obama believes more government spending is the tonic for all that ails us. Remarkably, Bush increased government spending across the board by 83% during his tenure, yet the economy still collapsed.
History tells us that more government spending is not the path to prosperity. Proponents of government spending often point to the New Deal as the model of success. In school, we were taught that Hoover’s austerity measures turned the stock market crash of 1929 into the Great Depression. Nothing could be further from the truth. Under Hoover, non-defense federal spending increased by 259% from 1929 to 1933. He started huge infrastructure projects and raised taxes on high earners. Even Roosevelt described Hoover’s spending as “extravagant and reckless” when campaigning for the presidency.
Despite the campaign rhetoric, Roosevelt simply expanded the government spending, tax hikes and control over the economy. As a result, we had the longest period of economic misery and stagnation in American history. In 1939, Roosevelt’s own Secretary of Treasury, Henry Morganthau, said, “We have tried spending money. We are spending more than we have ever spent before and it does not work. ... After eight years of this administration we have just as much unemployment as when we started.” Unemployment remained well above 17% in 1939. Many Roosevelt apologists argue the economy took another dip in 1937 because the administration cut spending. However, data shows spending only fell $600 million from 1936 to 1937; less than 1% of the nation’s GDP.
On February 17, 2009, Obama signed into law a massive government stimulus program. We have heard that the stimulus dollars helped stave off another depression. But the data suggests the economy started to turn the corner before the stimulus hit the street.
The economy bottomed out in the fourth quarter of 2008, with a negative 8.9% growth. The first quarter of FY 2009, ending December 31, 2008 was marginally better (-5.3%). Obama was sworn into office during the second quarter of FY 2009, which ended on March 31, 2009. Growth had nearly returned to baseline at -0.3%, and by the end of the third quarter (6/30/09) growth had risen to positive territory (1.4%), long before hundreds of billions were doled out across the country.
Bottom line: this administration is doubling down on the same fiscal policies from the 1930’s that only exacerbated economic stagnation and prolonged any recovery. Indeed, according to the non-partisan Congressional Budget Office (CBO), any signs of economic recovery aren’t visible for the remainder of this administration’s term, and a poor job market is looking to be the new normal.