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The Obama Watch
America's Record Recession
Keynesian economics was born in the 1930s, the brainchild of British economist John Maynard Keynes. It argued that the way to stimulate a flagging economy back into growth was to increase government spending and deficits. The extra demand for goods and services from that increased spending would induce increased production to meet the demand, restoring full employment and growth.
The concept was quickly embraced by politicians and lefty academics because it justified exactly what they wanted. For the liberal/left politicians dominant in Washington at the time, it gave them cover for the record government spending they wanted to buy votes, without having to raise taxes fully to pay for it. For the lefty academics, it gave them cover for their wish list of runaway government spending policies.
There was just one problem. It never worked to revive economic growth and end the Depression. Rather, as demonstrated by Amity Shlaes in her landmark book The Forgotten Man, it was one component of a slew of Big Government policies that put the "Great" into the "Great Depression," keeping unemployment absurdly high and preventing any natural, cyclical recovery for more than a decade.
The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then fully discredited in the 1970s, when the Keynesians could offer no explanation and no cure for the double digit inflation, interest rates, and unemployment, and the persistent stagnation, that resulted from their policies. President Reagan formally dumped Keynesianism in favor of free-market and supply-side policies that produced a 25-year global economic boom.
Yet, President Obama showed up in early 2009 with the dismissive certitude that none of this history ever happened, and national economic policy was decidedly back in the 1930s.
The New Failure of Keynesian Economics
According to the National Bureau of Economic Research, the
current recession started in December 2007. From the beginning,
we approached this recession with old-fashioned Keynesian
economics, rather than the more modern, incentives-oriented,
supply-side economics that has swept the world. In February,
2008, then President Bush cut a deal with Congressional Democrat
majorities to pass a $152 billion stimulus bill entirely based on
the Keynesian rationale of countering the recession with
increased spending and deficits. The centerpiece was a tax rebate
of up to $600 per person, which had no significant effect on
economic incentives, as reductions in tax rates do.
This Keynesian stimulus produced no significant blip in the raging economic downturn, richly earning its well deserved fate of having been completely forgotten. Bush Treasury Secretary Henry Paulsen, the economic guru of the Administration at the time, himself was intellectually stuck in the deep historical recesses of Keynesianism, failing to promote Reagan's free market and supply side policies to counter the downturn. Indeed, Reagan's 25-year global boom ended as the Bush Administration abandoned every component of Reaganomics one by one, culminating in Paulson's throwback Keynesian stimulus in early 2008.
Yet, contrary to his campaign theme of change, President Obama simply quintupled down on Bush's 2008 Keynesianism. Obama learned nothing from the Bush/Paulsen/Pelosi/Reid early 2008 Keynesian failure, which Senator Obama vigorously supported at the time. President Obama came back in February, 2009 to support a new, $787 billion, purely Keynesian stimulus bill.
Even the tax cut portion of that bill, which President Obama is still wildly touting to the public, was purely Keynesian. The centerpiece was a $400 per worker tax credit, which, again, has no significant effect on economic incentives. While President Obama is proclaiming that this delivered on his campaign promise to cut taxes for 95% of Americans, in the Democrat budget that passed Congress this year even this tax credit disappears after next year.
Since World War II, recessions have averaged 10 months, and the longest has been 16 months. Exactly when the current recession can be scored as over is unclear at this point (positive GDP growth may have finally restarted). But it now has been 20 months since the recession began in December 2007, and it will clearly end as the longest by far since World War II. Indeed, from 1887 to 1929, recessions averaged 10 months as well, with the longest during that time also 16 months. For over 120 years at least, recessions have lasted the longest only when countered by intellectually and practically discredited Keynesian economics.
We now hear loud hosannas not for recovery, but for the slowdown in economic decline, with only 250,000 jobs lost last month, and the economy declining by only 1% in the second quarter. Based on his rhetoric, President Obama expects political credit for anyone who still has a job!
This bar for success is way too low. As indicated above, real economic recovery is now overdue by at least 4 months. Rather than promoting recovery, the Keynesian economic policies adopted by both Obama and Bush since the beginning of this recession have more likely delayed it, by borrowing hundreds of billions and ultimately trillions in investment capital out of the private economy, and destroying the jobs that would have resulted from that money in the private economy.
Cycles Naturally Go Up As Well As Down
Remember the term business cycle? The sweeping,
pro-growth policies adopted by President Reagan were so
successful in preventing any major downturn for 25 years that we
don't seem to remember what that term means anymore. But it
implies that along with periodic downturns the economic
cycle will naturally turn up as well. Every morning the
American people wake up and throw themselves into restoring the
economic viability of their businesses, or finding themselves
jobs. This is the primary factor in causing the economy
eventually to turn back up.
The Keynesian economic policies adopted by Obama and Bush do nothing to help these businessmen and working people cure the economy. Borrowing close to a trillion dollars from the private economy to increase government spending by close to a trillion dollars does nothing to expand the economy on net. Indeed, it may well result in a net loss of jobs due to government carrying costs and the economic friction resulting from moving all of that money around. Moreover, again this policy does nothing to increase incentives for investment, starting new businesses, expanding businesses, creating new jobs, or entrepreneurship. For these reasons, the best estimate of the number of jobs saved or created by the Obama stimulus is exactly zero.
The result of the willfully blind, throwback, untutored Keynesian economic policies continued and wildly expanded by President Obama is the longest recession since World War II dragging on for around 20 months now, and maybe still more. Almost 7 million jobs have been destroyed during this overextended downturn. Besides the 250,000 additional jobs lost last month, another 422,000 former workers dropped out of the workforce altogether. Almost 800,000 workers are counted as officially discouraged because they can't find work, and so are not even counted as in the work force or in the official unemployment rate. Another 8.8 million who have been reduced to part-time status due to the recession are also not counted in the unemployment rate, and many others have suffered reduced hours as well. Over one third (5 million) of the 14.5 million unemployed have now been without work for at least 27 weeks, or about half a year, with almost 600,000 joining their ranks last month alone.
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DJ| 8.26.09 @ 6:24AM
Yes, it is real.
Worldwide same..............................
Appleby| 8.26.09 @ 7:03AM
I took economics in night school long after I had left university (where I failed it). The class was filled with businessmen and the book was Samuelson. Everyone in the classroom argued with the younger prof that the stuff he was teaching us did not work in reality, citing examples from our experience.
His response was to shout at us that the point of the class was for us to read the book and listen to him and pass the test at the end.
There, I have since come to believe, is the mantra of an entire generation, which has set our country on the road to ruin.
Robert Rosencrans| 8.26.09 @ 7:40AM
For just about every dollar spent by the federal government the overhead is tremendous, taking about 82 cents of every dollar to support bureaucracy overhead. No business could survive with such overhead.
Ryan| 8.26.09 @ 8:23AM
One problem that the current tax structure also propogates is tax havens. We wouldn't be going after UBS if the corporate tax rates in the country were more reasonable, because those people would be keeping their money here in America (or at least more of them).
HOW many billions are kept offshore, outside of American banks? How much less of a problem would we have if we could get that money - with cooperation, not prosecution - back into American banks?
Grzmlyk| 8.26.09 @ 8:33AM
That scratching you hear is Bob revving up his Ferrara-hate machine and copying his GDP and effective tax rate charts desperately to prove that his prediction that all would be rosy once again by the end of 2009 is still true, and that the collapse we are witnessing is a figment of right-wing ideologues' imaginations.
Bob, I hate to remind you, but there are only about 120 days left in 2009. If humpty dumpty is going to be put back together again in that time, shouldn't we start, you know, getting the glue out?
I know, I know: It's not your fault. You were right. It's just that blasted Reality got in the way of your charts and your theories.
Don't you hate it when that happens?
Grzmlyk| 8.26.09 @ 8:40AM
Robert, you are so right about the overhead.
That's why when people like "Liberal Reader" tell us that Medicare is run with a 3% administrative cost vs. about 33% for private insurance companies, my jaw drops to the ground. The truth about "administrative costs" for Medicare - and all government bureaucracy, is, as you say, over 80%!
Since when is supporting bloated bureaucracy with no profit incentive ipso facto MORE efficient than a for-profit business that must obey market forces (when they're not hopelessy distorted by government, of course)?
Answer: In the mind of the liberal. Never let reality impinge on the dream.
Karibou Kid| 8.26.09 @ 8:45AM
It is becoming obvious that anything that was not written by Karl Marx or Saul Alinsky is outside the current occupant of the White House's knowledge base.
Otis, my man!| 8.26.09 @ 8:55AM
FOOLS
NEVER
LEARN
Howard| 8.26.09 @ 9:33AM
I initially earned a degree in Economics. I soon realized that theory is fine on a campus. I went back to school for Accounting. One problem with the "Stimulus" bill is that the short-term projects have no long term influence on behavior or business. For instance a "shovel-ready" painting or paving program will only last a few weeks. That is not enough time for a worker or business owner to make a long term investment in equipment, housing or autos. It is make work that may accomplish a need, i.e. repair a bridge, but it does not have the effect of a "permanent" tax cut. Keynes theories do not seem to reflect those behavioral issues.
JerseyJ| 8.26.09 @ 10:30AM
Appleby ... "His response was to shout at us that the point of the class was for us to read the book and listen to him and pass the test at the end.
There, I have since come to believe, is the mantra of an entire generation, which has set our country on the road to ruin. "
I agree, yet it's not generational, it's geographical (as in within the beltway). Why else would our so-called representatives (including those who have been there for decades) be trying to sell us on whatever it is health reform is called these days, instead of listening to the views of those they purport to represent? The whole purpose of these meetings should be to listen to what their constituents want and try to represent that in DC. Instead, they come to tell us what they're planning and try to convince us we should go along with it. When did this complete shift in purpose happen?
11/2010 is a long way off.
Conrad Spiracy| 8.26.09 @ 11:02AM
JerseyJ,
"11/2010 is a long way off."
We don't have to wait that long. Read this thread from yesterday's Spectator. I didn't see your pseudonym in the thread, so you may have not seen it. Lots of debate about what to do and when.
http://spectator.org/archives/.....as-hot-air
Take care friend.
Con Spiracy
Campy| 8.26.09 @ 11:41AM
JerseyJ,
Respectfully, I have to agree with Appleby; it is generational, and apparently multigenerational—not simply geographical. Our 'institutions of higher learning'—the supposed 'bastions of free thought and examination'—are anything but. Seldom are professors teaching how to think, but instead, what to think.
How else to explain the continued denial of facts, history and experience? "What you see ain't really so, because Obama told me so."
Cris Worth| 8.26.09 @ 11:48AM
Never took a modern day marxist econ class and I'm thankful for it. I practice capitalist common sense...live within my means on average salary, pay my bills on time including one credit card at the end of the month therefore no interest paid to a greedy lender, save money, invest in things I like to buy and know a lot about, etc. so what's the problem?
JP| 8.26.09 @ 11:49AM
"11/2010 is a long way off."
But for the millions who've become unemployed since Feb, and who expected that the $780 billion stimulus bill would create new jobs, and who may remain unemployed through next year , 11/2010 couldn't come sooner.
Many people will remember that Obama's main focus was on Cap and Trade and ObamaCare and not growing the economy. Few will forget.
Todd| 8.26.09 @ 12:02PM
Great article Peter, the evidence is becoming clearer everyday that the stimulus has been a complete failure as we always knew it would be. History gave all the evidence we needed to know that beforehand but that does not matter to the Statist who inhabit the White House and all around Washington D.C. It was all about power and increasing the size of the government, nothing to do with actually helping the economy recover. Keynesian economics is a complete failure and lacks any basis in reality, the reason for its embrace by politicians and academics is accurately stated in the 2nd paragraph of this outstanding article.
Grzmlyk beat me to the punch about Bob, we all know he hates Peter because he is a heretical Harvard alumnus. Who you gonna believe, your lying eyes or Bob's charts? The cognitive dissonance of someone who claims to be a fiscal conservative but supports Keynesian economics is astounding. You have to conclude they either are untruthful or insane or a combination of both.
Paul from SA| 8.26.09 @ 12:20PM
Peter, great article. Thanks.
An interesting study is the Unknown Depression of 1920 which was was a much worse than the Great Depression.
The main reason it is unknown is because we recovered from it so quickly. The gov't (Harding) responded by cutting spending, cutting taxes and reducing [WWI] debt.
http://www.meltingpotproject.c.....-1920.html
“…the feds hardly did anything at all:
Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes fell from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding's policies started a trend. The low point for federal taxes was reached in 1924; for federal spending, in1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930.
With Harding's tax and spending cuts and relatively non-interventionist economic policy, GNP rebounded to $74.1 billion in 1922. The number of unemployed fell to 2.8 million— a reported 6.7 percent of the labor force— in 1922. So, just a year and a half after Harding became president, the Roaring Twenties were underway. The unemployment rate continued to decline, reaching an extraordinary low of 1.8 percent in 1926. Since then, the unemployment rate has been lower only once in wartime (1944), and never in peacetime.”
Another reason it is unknown is our leftist educators don't know about it and if they did, they want to keep it a secret.
Wesley Mouch| 8.26.09 @ 12:25PM
I agree with the author's assessment of Keynes but suspect his support to supply side economics as a remedy is misplaced. We appear to have hit the zero hour for debt growth, where the marginal utility of debt has turned negative. There are no means available to prevent a collapse of a credit-based economy when this occurs. You either let it collapse into a deflationary depression or try & fix it & have a hyperinflationary depression. There is no muddle through & it is not political, it's just math.
fundamentalist| 8.26.09 @ 1:53PM
Great job, Pete! Thanks!
Here is Hayek reinforcing your argument from his 1974 speech accepting the Nobel Prize:
"We have indeed at the moment little cause for pride: as a profession we have made a mess of things....The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level...In fact, in the case discussed, the very measures which the dominant "macro-economic" theory has recommended as a remedy for unemployment, namely the increase of aggregate demand, have become a cause of a very extensive misallocation of resources which is likely to make later large-scale unemployment inevitable. The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate - or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing; "
Dixie Pixie| 8.26.09 @ 4:31PM
Depression Era policies will always produce Depression Era results. Why can't the Liberals learn from history????
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Marc Jeric| 8.27.09 @ 4:50AM
No - Abu Hussein is not a dunce, he knows exactly what he is doing. The complete power takeover by the communist government needs a big crisis - the bigger the better. Destroy the banks and financial institutions - then nationalize them. Destroy car industry with regulations and unions - then nationalize them. Destroy health insurance companies by regulations - then nationalize them. Destroy the legal immigration system - then amnesty the 50 million Mexican Indians. Destroy the energy industries by cap& trade - then nationalize them. I will leave the rest of this jeremiad to others/
Mark A. Sadowski| 8.27.09 @ 12:12PM
"According to the National Bureau of Economic Research, the current recession started in December 2007. From the beginning, we approached this recession with old-fashioned Keynesian economics, rather than the more modern, incentives-oriented, supply-side economics that has swept the world. In February, 2008, then President Bush cut a deal with Congressional Democrat majorities to pass a $152 billion stimulus bill entirely based on the Keynesian rationale of countering the recession with increased spending and deficits. The centerpiece was a tax rebate of up to $600 per person, which had no significant effect on economic incentives, as reductions in tax rates do.
This Keynesian stimulus produced no significant blip in the raging economic downturn, richly earning its well deserved fate of having been completely forgotten."
It hasn't been forgotten by everybody. In the six quarters since the recession began there was only one quarter with postitive growth in GDP. Guess which quarter that was? If you guessed that it was the second quarter of 2008, the quarter that the Bush stimulus went into effect, you get a cigar.
The CBO recently published some additional analysis of the Bush stimulus. It found that it added about 2.3% to growth in consumption at an annual rate in the second quarter of 2008 or 1.6% to GDP. Since GDP grew by 1.5% at an annual rate that quarter, the only positive growth in the last year and a half was all due to a Keynesian stimulus:
http://www.cbo.gov/ftpdocs/96x.....imulus.pdf
It's also worth noting that Australia, China, Japan and Korea all had larger stimuli as a percentage of GDP this year than the US. All had Q2 GDP growth rates better than average compared to what J.P. Morgan forecast last November, and all but Australia did doing *much* better than average (6% to 7% better). Of the 11 major nations whose discretionary fiscal stimuli are less than 1.5% of GDP in 2009 (that includes France, Germany, Italy etc.) all but Brazil had Q2 GDP growth rates worse than average compared to last November's forecast.
Spare Tire| 8.27.09 @ 2:27PM
http://economistsview.typepad......mbies.html
Richard Roby| 8.27.09 @ 8:35PM
You seem to know little about Keynes' theories. Bailing out the banks at taxpayer expense, and funding government workers when pertenant tax revenues are insufficient, has nothing to do with the liquidity trap and government investment. through
Tom| 8.27.09 @ 10:59PM
The article says that "even communist China enjoyed reviving growth" when talking about countries that rejected Keynesianism. I've read that China had a pretty big stimulus (see below). Can anyone explain exactly why it was not the cause of growth and which free market policies they have that were?
http://www.businessweek.com/gl.....793026.htm
Mark A. Sadowski| 8.29.09 @ 2:34PM
"Rejecting Obama's rigid, doctrinaire Keynesianism.......even communist China enjoying reviving growth as well."
@Tom,
The irony (or is it ignorance or demagogery?) was not lost on me. China's stimulus is 4 trillion yuan or $586 billion. As Forbes pointed out in an article entitled "China Announces Massive Stimulus Package":
"China's stimulus package amounts to nearly 15% of annual economic output spread over barely two years."
http://www.forbes.com/2008/11/.....notes.html
It's easily the largest stimulus proportional to GDP among the 23 major nations that enacted fiscal stimuli (The equivalent for the US would be $2.1 trillion). And based on other articles I've been reading most of the uptick in commodities prices and trade we're seeing right now is almost entirely due to China. So here we have the spectacle of the world economic recovery being driven almost entirely by a Communist country's massive Keynesian stimulus while glibertarian ideologues are still insisting discretionary fiscal stimulus doesn't work. Sheeesh!
Father Zosimma| 8.29.09 @ 4:18PM
The Marxist in the White House has, indeed, made economic matters worse; yet, lest anyone forget, this country started well down the road to economic ruin under Dubya's regime. When the bailout package was proposed last September, few Republicans had the courage to oppose it, and after McCain got solidly behind it, effectively making Obama's November victory a foregone conclusion, he should have just conceded the election at that point and spared the country a campaign, which almost all but McCain, recognized had become a two-bit charade.
When Republicans aren't whining about Democrat profligacy, they're busy wasting taxpayer money through pet projects of their own.
While Obama and the Democrats are the problem, The Grand Old Party is definitely NOT the solution.
Richard Baker| 8.30.09 @ 2:33PM
Regardless of the party, when you eat the seed corn, you can't grow more corn. Government interference and fiat are eating the seed corn of our system and without that risk-taking and capital the system can't grow more wealth and prosperity. A stunted and minimal crop is the result. Every farmer would know that. Keynesian ideas are national suicide regardless of where they are tried and as Justice Jackson once noted, "The Constitution is not a suicide pact".
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