Why this Recovery is Different (Worse) than All the Others?

Why this Recovery is Different (Worse) than All the Others?

The good news for the last 3 ½ years has been that the “Great Recession” of 2008, the deepest economic hit to America since the 1930’s Great Depression, has actually ended. Yes it really did, Bubba. Really. In June of 2009, according to every living breathing economist still alive, and also some who have died since.

So why are we still in a Jimmy Carter style economic “malaise”? 

· With Q3 GDP growth at a pitifully anemic 1.3%?

· With GDP in 2012 weaker than 2011?

· With GDP growth in 2011 weaker than 2010?

· With unemployment at 7.8%, after being above 8% for 43 consecutive months?

· With 23 million Americans unemployed or under-employed?

· With $6 Trillion debt added in 3 ½ years, more debt than added by all previous presidents?

· With a $16 Trillion national debt looming?

· With the “Fiscal Cliff” looming January 1, 2013, including massive defense cuts?

HUH?

WTF!

LOL?

 

Why is this happening? We’re supposed to be in a RECOVERY.

Well, there’s a whole lot of wringing of hands goin’ on. You know. Whimper, whimper. Bleat, bleat. We now get adenoidal explanations like: 

1) “Hey dude, it’s the new normal. You know. Like Camus in The Stranger, we have to surrender to the cosmic sphinx - like incomprehensible forces of the great unknown. “

2) The Great Recession was soooo bad, that NOBODY, not even Bill Clinton could have fixed it.

3) It was all W’s fault.

OK. All right. FINE…But excuse me for just a cotton pickin’ moment. How ‘bout we look at previous recoveries from recessions? Even as far back as 1893 and Chester A. Arthur?

Well, Figure 1 (above) shows, (in red) the “potential GDP” historical trend lines, along with (in blue) the GDP growth that actual that occurred after: 

(a) the infamous Chester A. Arthur recession of 1893-94

(b) the catastrophic Teddy Roosevelt recession of 1907-08

(c) the Ronald Reagan recession of 1981-82, and finally 

(d) the Barack Obama recovery from the Great Recession of 2008-09. 

As Big Bird would say: “Which of these things is not like the other?”

Recovery means returning to a trend (red lines in Figure 1) that was present before the recession occurred. But the Obama recovery is unique in that “return to trend” is just not happening after the Great Recession of 2008-09 recession! Very unusual compared to historical recessions. The actual GDP recovery line in blue for the dismally anemic Obama recovery has stayed below the red trend line, and there is no sign that it will ever again rise to meet the red historical trend line. This is unique among all recorded previous recessions, all of which recoverd to again join the historical trend line. The Obama recovery has gapped down releative to the trend line, and remains down.

In addition, as can be seen in the Figure, every single previous recession was followed by vigorous period of  GDP growth of 7% - 8%, sufficient to bring the GDP growth back to historical trend levels. Except the Great Recession. So the question becomes: “Why is the recovery from the Great Recession under Obama so dismally poor?”.

Well, let's review just what things have the most impact on GDP? The most important of these are:

· Available capital for investment

· Available labor force

· Labor productivity

· Fiscal and Government Policy

The current recovery is weak across the board, including for example construction, housing, and labor participation rate (i. e., the fraction of the working age workforce that is working), and the savings rate. Unemployment in the Reagan recession of ’81-’82 reached 10.8%, which was actually worse than the Great Recession. But it recovered much much quicker after 1982 than after 2009. It is also worth noting that the Great Recession was in no way unique with regard to being financial in nature – all the other recessions shown in Figure 1 were also financial crises. 

So what is the answer?Why is this recovery differenent from all the others?

According to Stanford University economist John Taylor, by far the most significant factor which impact the strength of economic recoveries is Fiscal and Government policy. of the Obama administration, mucking up what would have been a much much better recovery after 2009. For example, in the Great Depression of the 1930’s, the policies of FDR and the Federal Reserve made things worse and actually hampered the recovery. Specifically:

Great Depression Policies Which Hampered Recovery

· Federal Reserve tight money Policy, which reduced the country’s money supply by about 30%, reducing
  business investment.

· Snoot-Hawley Tariffs, reducing exports and business activity

· Tax Increases by both Hoover and FDR, reducing business investment.

· FDR’s Retained Earnings Tax, reducing business investment.

· Federal Reserve increased Bank Reserve Requirements, reducing business investment.

The case that Stanford University Professor John Taylor makes is:

-> bad government policy helped create the mess of the Great Depression, and 

->  bad government policy compounded the problem by hampering the recovery.

Turning his attention to the recovery post the Great Recession, Professor Taylor identifies specific government economic and fiscal policies responsible for the uniquely anemic and poor recovery of the last 3 ½ years. Specifically, these are as follows:

· The Stimulus Packages of Bush ($160 Billion, March 2008) in the form of a tax rebate, had almost no
  effect, and even worse, the Stimulus Packages of Obama ($865 Billion, February 2009) most of which was
  massive government spending to fund state governments, had very little effect.

· Obama’s “Cash for Clunkers” program had none or detrimental effect.

· Obama’s Subsidizing of First Time Home Buyers had no effect.

Professor Taylor (who is the odds on favorite to become Federal Reserve Chairman if Romney is elected), summarized the reasons for the failure of the above policies as follows:

· Discretionary temporary government measures have a negative impact on a recovery, because they create uncertainty, and at best only have a short term impact. Such measures do not create a sustainable recovery, but make businesses worried about investing, and reduce business activity and business investment.

· Uncertainty is a very important factor, since it makes it harder for business people to make long term decisions when the economic environment is uncertain.

This is the answer to why and how:

 

-> Obama has made the current recover uniquely worse than any other recovery in the 19th and 20th century. 

-> With policies which created nothing but uncertainty. 

-> And uncertainty killed the recovery.