Thursday, August 23, 2012

Global Recession Ahead? ... More Government "Help" Ahead, Too? ... If So, How Harmful Will More Government "Help" Actually Be?

The triple whammy of slowing economies in the China, Europe and the U.S. has become crystal clear in several announcements yesterday and today.

To get the complete picture, please see (1) China Manufacturing Gauge Falls to Nine-Month Low, (2) Euro-Zone Business Activity Points to Recession, (3) Fed Moving Closer to Action and (4) GM in Deal to Cut Working Hours at German Plants.

Taken as a whole, these articles all point to further global economic weakness, and in some cases recession in 2013 and perhaps beyond. But won't the various governments come to the rescue and prevent recessions from occurring throughout the world? Won't they be able to save us and get the economies moving again by their enlightened monetary and fiscal policy actions? My answer is a strong NO.

With respect to having a favorable impact on economic growth and employment, today's governments, especially in Europe and the United States, are finally being exposed for what they really are -- emperors with no clothes -- except they're worse than that. They not only don't help, but they actually are harming our economies. And they may continue to do so indefinitely, depending on how We the People react to all this government knows best activity which has resulted in everybody drinking champagne while we need to be on a beer budget.

Despite what the President says, think about the U.S. government's likely success or failure in "saving GM," for example, when reading the above referenced article about GM, its European issues and the health of the global auto industry.

And please also consider what big government spending, investment and stimulus programs have done to us as big spending Keynesians have ruled governments throughout most of Europe and the U.S. as well.

The Cliff the Keynesians Built tells the history of government "help" and its impact on economic well being and growth:

"'A stimulus program should be timely, targeted and temporary."

—Lawrence Summers, January 29, 2008

Well, well. So the folks who have run U.S. economic policy since 2008 are alarmed about the peril of the 2013 "fiscal cliff." Too bad they didn't worry about that when they were creating the very ledge they now lament.

The latest warning comes from the Congressional Budget Office, which estimated in its mid-year budget outlook Wednesday that the economy will return to recession in 2013 if taxes rise and spending falls on schedule in January. "Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession," say the CBO sachems, "with real GDP declining by 0.5 percent" from this year's fourth quarter to the final quarter of next year and unemployment rising to about 9% from 8.3%. . . .

One point to keep in mind is that CBO's economists are as true-blue Keynesians as exist on the planet. Like the Obama White House and Treasury, they believe in the "multiplier" that $1 of federal spending somehow creates $1.50 in greater GDP. Thus they plug large spending cuts into their economic models, and, presto, they find a recession. . . .

The larger policy point is that this is the fiscal cliff the Keynesians built. The 2008 quote above from Larry Summers, the Harvard economist who later became President Obama's chief economic adviser, sums up the mindset that has dominated policy for most of the last decade and especially since 2008.

Rather than provide predictable, consistent policy for the long term, the Summers-Obama-Geithner-Krugman theory goes that government should jolt the economy with spending and tax cuts that are targeted and temporary. The jolt will drive the economy out of recession, rapid growth will resume, and the wizards of Harvard Yard can then tell us the precise moment when the stimulus can be withdrawn and taxes should rise again.

Or, if the jolt doesn't work, then order up another jolt, which makes the tax cliff even steeper.

The last decade has provided as clear a market test of this proposition as one can get. . . .

Then came the $830 billion stimulus of February 2009, followed by other "targeted and temporary" measures like cash for clunkers and the first-time homebuyer's tax credit. GDP rose modestly as the economy recovered, albeit at a historically slow pace considering the depth of the recession. The rate of growth has since sputtered in each of the last three years. . . .

Republicans are pointing to the CBO report as proof of Mr. Obama's policy failure, and it is. But rather than gawking at the potential for another recession, they ought to explain the folly of "temporary, targeted" tax and spending stimulus. The fleeting tax elixir does little to change incentives to work or invest because everyone knows its impact is temporary. It also creates tremendous uncertainty as expiration nears, which can also harm incentives and growth.

The problem is political, but more important it is intellectual. The Keynesians and their allies who have dominated tax policy for most of the last decade (the 2003 bill excepted) need to be exiled back to Harvard, Princeton and Wall Street. And the Romney-Ryan Republicans need to understand and not repeat the Bush mistakes of 2001 and 2008.

Instead of "timely, targeted and temporary," tax policy should include lower rates (and fewer loopholes) that are applied as broadly as possible and are permanent. These were the principles that guided the Reagan policy of the 1980s, and they need to be revived."

Summing Up

China is slowing, Europe is slowing and the U.S. is in danger of remaining at stall speed or worse.

If we get our act together, over time the U.S. will resume its position as a strong and world leading vibrant and solidly growing economy.

In turn, that will increase prosperity and employment opportunities for generations of future Americans. It's time for a U-turn.

On the other hand, if we continue to follow the failed policies of the past and rely on government spending to fix our problems, we'll leave more and more debt for our future generations to pay back.

By so doing, we'll get more of the same old crap, and our future generations will get screwed.

It's our choice.

Thanks. Bob.

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