According to a new survey from the Associated Press (AP), fully 80% of Americans are near poverty, rely on welfare, or are unemployed amid signs of deteriorating economic security and an elusive American dream. More than 19 million whites fall below the poverty line of $23,021 for a family of four – accounting for more than 40% of America’s poor – nearly double the number of poor blacks.
This data underlines one very scary point: As President Barack Obama pivots toward economic recovery for a 19th time, the result will be the same. How can he fix things? Drop his extremist ideological devotion to Keynesian economic theory and tries something different.
What amazes me though is that the very economic policies that the Obama administration has advocated “to grow the middle class” have never been stronger. The federal government is spending more money (in both hard dollars and as a percentage of GDP) than ever before. Rules and regulations from the Securities and Exchange Commission (SEC) to the Environmental Protection Agency (EPA) have never been more aggressive. The Federal Reserve’s monetary intervention is so entrenched with the economy it is now fully in sync with the stock markets’ action on a daily basis.
Yet the labor force participation rate – which measures the number of working age Americans (16-64) actively working or looking for work – is the lowest it’s been in more than 30 years. Barely half the U.S. population is paying any taxes on income. For the first time in history, there are more Americans collecting welfare (101 million, or about a third of the country) than there are adults working full-time in the private sector (97 million, or less than half of adults).
In other words, the very same policies that progressives claim are “protecting” or “growing the middle class” are in effect doing the complete opposite – they’re preventing normal to strong economic growth (suppressing it below its potential growth for the remainder of this administration’s term, according to the non-partisan Congressional Budget Office [CBO]), producing a part-time worker society and only growing the welfare state. How is that “growing/protecting” the middle class?
Naturally, most Keynesian progressives will point the finger anywhere else for the results of these policies. Some will say this is all due to the decrease of assembly line or manufacturing jobs as we advance into a globalized economy going into the 21st century (a trend, by the way, that’s irreversible despite all the protectionist tariffs they can dream of). Others still like to blame the Great Recession for America’s economic woes (a recession that’s been over for years now).
Given U.S. cost structures, it makes the most economic sense to produce commodity products in countries with lower wage rates, while more expensive U.S. labor can justifiably be deployed in more specialized products requiring greater expertise. That’s why specialty steel is still produced in some parts of the U.S. today, while commodity steel is produced in other countries such as Russia, India, and China.
Recessions are a routine, logical conclusion to every business cycle. They reveal weak businesses and destroy them, freeing up resources for new enterprises. Recessions occur when, as is inevitable, inefficiencies and irrationalities build up in the financial and economic system. The resulting economic downturn imposes a harsh discipline that destroys the inefficient, encourages everyone to become more efficient, and opens the doors to new businesses using new technologies and business models. For example, the 2001 dot-come bubble burst smashed the U.S. technology sector, but that opened the door for Google Inc.
The business cycle works well, but of course, the human costs cannot be ignored. The collapse of inefficient businesses leaves workers without jobs, investors without money and society less stable than before. Adjusting to the fluctuating landscape can be an inconvenient experience at best.
So enter the politicians.
Many office seekers will say whatever it takes to get elected, making unsustainable promises or boasting claims that have no root in economic reality whatsoever just to tell some voters what they want to hear. They make unsustainable claims that entitlement programs for everyone from seniors to those in poverty are completely solvent and need no reforms. They tell unions that they can bring back manufacturing jobs and reverse the last half century’s worth of globalization, and so on.
Upon getting elected, they then implement policies that only make matters worse, by preventing the economic recovery and extending the misery. We saw it in the 1930s, we saw it in the 1970s, and we’re seeing it again today.
Government intervention is precisely why the economy was never able to recover and come back stronger like it did in any of the last 10 recessions.
As I highlighted in a previous article written with Gary W. Patterson Jr., the Harding administration took the complete opposite approach after the Recession of 1920 – when unemployment jumped from 4% to 12% by 1921. It cut the government’s budget nearly in half between 1920 and 1922. Tax rates were slashed for all income groups. The national debt was reduced by one-third and the Federal Reserve did not move to use its powers to turn the money supply around and fight the contraction. Unemployment fell back down to 6.7% in 1922 and it was only 2.4% by 1923, as the “Roaring Twenties” continued to produce an economic boom of growth and prosperity.
President Ronald Reagan worked with a Democratic Congress to implement similar solutions to grow the economy, from lowering corporate and income tax rates to scaling back the strangulation of government regulations on the private sector. The resulting GDP and job growth reduced unemployment from almost 11% to below 6% and increased the number of Americans paying income taxes to 85%. It’s that kind of growth that allows Americans to buy their own health care coverage, purchase homes, and live the American dream.
Or when President Bill Clinton worked with a Republican Congress to slash federal spending from 22% of GDP down to 18% (a decrease on a scale not seen since the 1950s), helping to balance the budget for the first time in 30 years as well as implement welfare reform that actually sought to transition recipients off of federal aid and into the workforce – leading unemployment to plummet from 7.3% to 3.9%. Did the economy tank as a result of lower public sector spending? Quite the opposite, the 1990s continued an economic boom of growth and prosperity throughout the decade – rooted in the idea that the private sector can spend its own money smarter, more efficiently and more productively than the public sector ever could.
These used to be common sense, bipartisan solutions understood on both sides of the aisle as productive to growing your way out of recession.
But with the election of the Obama administration in 2008 – an administration with the least amount of private sector experience of any in the past 100 years – and all the academic progressives that came with it, came an extremist ideological devotion to Keynesian economic theory. It raised tax rates to their highest levels not seen since the economic malaise of the 1970s. It ballooned federal spending to unprecedented levels – more than twice the rate of the Bush administration (which remarkably increased government spending across the board by 83% – the biggest spike since LBJ’s “Great Society” – yet the economy still collapsed). The results of the policies have stubbornly kept unemployment above 7.5% for the longest stretch ever in U.S. history.
Trying to “pivot” towards an economic recovery for a 19th time, the Obama administration is sticking to its extremist ideological devotion to Keynesian economic theory. It wants to raise taxes even higher. It wants to expand aggressive regulations even further. It refuses to cut a single dollar of federal spending beyond what was mandated by sequestration after it became law (a 2% reduction in future levels of federal spending over the next 10 years from $47 trillion to $46 trillion). Was there a smarter way to cut 2% of the budget? Of course, and there’s plenty more room for spending reform, but as has been clearly demonstrated by this administration over the last 4.5 years, that’s a conversation it refuses to have with anyone.
President Obama even went so far as to blame “political posturing” and “distractions” (which is rich, coming from him) for the lack of economic recovery and a struggling middle class. Even if the recent scandals plaguing his administration are “phony,” as he alleges, did the Iran-Contra scandal prevent economic recovery in the 1980s? Did the Monica Lewinsky sex scandal prevent economic recovery in the 1990s?
The truth is the Obama administration has no one to blame but their own strict, uncompromising devotion to its academic progressive ideology. It’s refused to work with Congress in implementing the same common sense, bipartisan solutions that Reagan enacted with a Democratic Congress or Clinton enacted with a Republican Congress to grow the economy, lower unemployment, and incentivize private sector spending and investment (the true key to economic recovery). Obama seems more interested in staying on the campaign trail, giving speeches and fundraising non-stop instead of leading solutions back in Washington like his predecessors did.
And as the AP survey clearly illustrates, it’s the middle and working class who are suffering as a result.