Monday, July 2, 2012

A Slow Motion Economic Recovery ... Why?

This Friday brings another monthly unemployment report. Last month's was weak, and this month's report will be weak as well. For that matter, reports in future months will likely show a struggling economy continuing into 2013 and beyond.

So let's review some recent history. Here's what one editorial writer said about all this one month ago. He was right then and he is still right now, too.

The editorial provides ample evidence that we're in for a long hard time. And as government continues to expand, and operating deficits and the national debt keep growing as well, there is very little, if any, near term reason for optimism.

As the old saying puts it, if you're doing the wrong thing, you're probably doing it poorly. Looking to government spending growth is the wrong thing to be doing, and government's decisions with respect to how to spend that wrong spending have been poor, to say the least.

Why This Slow Recovery Is Like No Recovery is a recent editorial by a Harvard economics professor that tells the factual story of our slow motion economic recovery as well as the reasons therefor. {NOTE: At the time of adopting the $800 billion stimulus program a few short years ago, the Obama administration estimated that we'd have unemployment of 5.2% today instead of the 8.2% that actually exists.  What happened to this economy and why it happened or didn't happen, as the case may be, is the subject of the editorial by professor Barro}:

"Last week's dismal jobs report showed little change in payroll employment for May and a slight rise in the unemployment rate to 8.2%, thereby underscoring the weakness of the economic recovery. Although changes in payroll employment and the unemployment rate are important, the key gauge of recession and recovery is the growth rate of real gross domestic product, and that is where our core problems lie.

The average annual growth rate of U.S. GDP since 1948 has been 3.1%. In the recession starting in the third quarter of 2007 and ending in the second quarter of 2009, GDP fell by nearly 5%. But this decline is 10% when gauged relative to trend—that is, after factoring in normal growth. To make up for this shortfall, the subsequent recovery has to attain growth rates averaging above 3% for several years.

This is not an unreasonable expectation. For instance, the GDP growth rate averaged 4.3% per year from 1982 to 1989 following the deep recession of the early 1980s. Yet in the current "recovery," beginning in the second quarter of 2009, growth has averaged only 2.4% per year, and just 1.8% for the first quarter of 2012. This low growth means that the U.S. economy has actually been falling further and further behind the normal trend. Therefore, it is not a recovery at all.

The Obama administration likes to blame the country's weak economic performance on the Bush administration, Europe's debt crisis, Japan's tsunami and so on. President Obama's advisers are now saying they learned only gradually that the economy was in even worse shape than they had imagined in 2009. But even if this is so, it gets the signals backwards: A bigger recession predicts a stronger recovery (as has to be true for the economy to return to its trend line).

The pattern of strong recoveries following sharp downturns is clear when one examines the history of economic disasters. The worst depressions relate to wartime destruction, and the subsequent peacetime periods typically exhibit strong growth. Examples include the high post-World War II growth rates in Japan, Germany and much of Western Europe.

A better argument can be made that recoveries are typically sluggish following a real-estate crash and prolonged declines in housing prices, as the U.S. has recently experienced. . . . The bottom line is that housing crises do impede subsequent recoveries.

However, the average GDP growth rate during the U.S. recovery since 2009 remains nearly 2% per year lower than would be expected . . .

To achieve a real recovery, government policy should focus on individual incentives to work, produce and invest. Central here are tax rates and regulations, including especially clarity about future policies. In a successful policy package, the government would get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.

The Obama administration seems to think that individual incentives and serious fiscal reforms are of no great importance and policy should emphasize Keynesian-style demand stimulus (public works, prolonged benefits) along with bits of industrial policy (loans and grants to "green" energy companies). This approach has failed for three years."

Summing Up

The private sector does matter, regardless of what President Obama's administration believes. And hiring more government workers to "stimulate" consumer demand is a zero sum game at best and an economic loser at worst. Borrowing so the government can spend more money in the midst of a debt and deficits debacle brought on by years of reckless spending and related debt accumulation is just plain nuts.

Until we free up the private sector to encourage it to grow and create millions of needed jobs in the process, our economy will continue to struggle. Of that I'm certain.

So unless we begin to downsize the public sector materially and restrict spending on redistributionist programs in a thoughtful and responsible manner, we'll muddle through the next several years at best.

Our debts and deficits are out of hand and need private sector economic growth to eliminate the current imbalance between debt and GDP. There is simply no other credible way to grow the economy sufficiently. And the President isn't helping to make the case right now, for whatever reason.

One frustrating part of all this is that the energy sector, as an example, is prepared to create jobs and boost economic output if, as and when allowed to do so by the federal government.

Although President Obama says he's supportive of an "all of the above" approach to U.S. energy independence, it reminds me of what comedian Richard Pryor liked to say, "Who are you going to believe? Me or your lying eyes?"

I'd say the "eyes" have it.

But I'd also say that in the end, We the People will win. We always do.

That said, why do we have to overcome our government to achieve that American victory?

As I said earlier, it's just plain nuts.

Thanks. Bob.

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