Two recent newspaper columns confirm that US economic recovery will be much slower over the period 2009 to 2011 than was the case over the period 1982 to 1984:
Neil Irwin, ‘Jubilation exceeds economic reality: reasons for caution’ The Washington Post, April 13, 2010
Joseph Curl, ‘Personal income falls 3.2% during Obama’s 15 months’, The Washington Times, April 13, 2010
Economic recovery in the United States began in June 2009 with an upturn in gross domestic product. Over the following three quarters, ending in March 2010, the cumulative percentage increase in gross domestic product was barely 5 per cent, while the cumulative percentage growth in employment was -0-6 per cent. Economic recovery was significantly more brisk following the initial upturn in November 1982 from the equally deep recession that started in 1980. In that earlier case, over the following three quarters, gross domestic product increased cumulatively by 8.3 per cent, while the cumulative percentage growth in employment was 1.5 per cent. In my judgment, the major difference between these two events was the unwillingness of President Reagan and the Congress to flush stimulus monies down the toilet and to nationalize significant sectors of the economy in 1981-1982 and the eagerness of Presidents Bush and Obama and Congress to impose such solutions in 2008-2009. As modern economic theory predicts, government supplied uppers become downers, stimulants become depressants, in any economy blessed with good economic information.
In any event, the statistics define a depressing, if not exactly a depressed, picture for America’s national economy. The stock market surely has recovered well from its March 2009 low. But it is still functioning only at 79 per cent of its 2007 peak. The growth in gross domestic product has barely caught up with its decline during the 2008-2009 recession. The turnaround in employment during the first quarter of 2010, listed at 162,000 additional jobs, is something of a mirage, partly a result of temporary hirings by the Census Bureau, partly a result of a rebound from February snowstorms. The underlying employment growth was only some 50,000 jobs, well below the 130,000 new jobs required just to keep pace with population growth. Real personal income for Americans – excluding such government payouts as Social Security – has fallen by 3.2 per cent since President Obama took office in January 2009.
Douglas Holtz-Eakin, former director of the nonpartisan Congressional Budget Office, has noted that, under President Obama, only federal spending has increased. Jobs, business start-ups, and incomes are all down. In his judgment, this is proof that the government cannot spend its way to prosperity. The CBO reports that per capita income (which includes government transfers) increased during President Bush’s two terms in office from $29,159 to $32,632, whereas it fell by nearly one per cent to $32,343 (all in 2005 prices) during the first 15 months of President Obama’s term.
Prognosis for the short-term future of the US economy is no less depressing. The US economy is expected to grow at 3.1 per cent during 2010, according to a consensus of forecasters surveyed by the Blue Chip Economic Indicators. That growth rate is close to the long-term trend, and well below past growth rates during initial upturns from deep recessions. Such a growth rate, in an expanding labor market, will barely dent the current 9.7 per cent rate of unemployment, which itself is at least two percentage points above the level predicted a year ago by President Obama’s over-optimistic, hydraulic Keynesian, economic advisors, Lawrence Summers and Christina Romer.
There are many reasons for this anaemic growth rate in the US economy. Total household debt, at 94 per cent of gross domestic product in December 2009, is down only two percentage points from 96 per cent when the recession began in 2008. By contrast, in 2000, the ratio of household debt to GDP was only 70 per cent. To return to that ratio, US households would have to pay down $3.4 trillion of debt, and that must impose a drag of economic recovery. As the federal government’s stimulus packages wind down during 2010 and 2011, transient government jobs will disappear. The overhang of the federal debt will choke private investment. Pending increases in the level of federal taxation will constrain consumption outlays by prudent households (certainly among the 50 per cent that actually pay income taxes, and perhaps among some of the remaining 50 per cent that shortly will pay consumption taxes). An excessive supply of high-powered money, once bank-lending picks up, will generate stagflation of an unwelcome 1970s vintage.
My prediction is that the debt crisis and stagflation together will lower the long-term growth rate of the national economy to its 1970 magnitudes, and that Presidents Bush and Obama, together with Alan Greenspan and Ben Bernanke, will have raised the natural rate of unemployment by at least three percentage points, from 5 to 8 per cent, by their fiscal imprudence and socialist policies.