The Public Policy

When Is the Economic Recovery Due?

Even if it comes, under current policies it will only set the stage for a new recession immediately in its wake.

By 3.11.09

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When can we expect economic recovery from the current steep recession causing so much suffering for the American people? That has been the main focus of Obama's Administration so far. Will his policies speed or delay, and strengthen or weaken, the recovery?

The National Bureau of Economic Research (NBER) is the official scorekeeper as to when recessions start and end. The NBER says the current recession started in December, 2007.

NBER also reports that the average length of U.S. recessions since World War II has been 10.4 months. With the current recession starting in December, 2007, we have long since blown past that average.

The NBER further reports that the longest recession since World War II has been 16 months. We will break that record next month.

Even granting some leeway, we should expect recovery, defined as the return of economic growth, by mid-spring, when otherwise we will be breaking records every day for the longest recession in the modern era. If economic growth does not resume by then, we can legitimately ask whether Obama's policies are delaying the recovery rather than helping to restore it.

When the economy falls into recession, it does not keep falling until the government comes up with the brilliant policy to turn it around. Though with foolish policies the government can keep the downturn going for a long time -- see, e.g., The Great Depression.

We still have the biggest, most powerful, capitalist economy in world history. Every morning, hundreds of millions of hard working, skilled Americans wake up and go to work trying to make the economy more productive than the day before. That is what makes the economy eventually recover on its own, always within 16 months since World War II. Government can make this recovery faster and stronger with smart policies that contribute to economic growth. Or the government can delay the recovery and make it weaker with dumb policies that hold the economy back.

I expect Obama's policies to delay recovery and make it weaker than it would be otherwise. The stimulus package just added a trillion dollars to government spending and the national debt. It did nothing to enhance incentives for saving, investment, starting or expanding businesses, job creation, entrepreneurship, or work. Economic growth does not result from massive increases in welfare, $2 trillion dollar deficits, and soaring government spending and debt, which is all that Obama's stimulus foolishness does.

Then the week after the stimulus passed, Obama turned to supporting another $400 billion in increased spending, for this year alone, in the so-called omnibus spending bill. The next week, Obama proposed an additional $275 billion housing bailout. Obama's budget reserved another $250 billion for still more bank bailouts, on top of the remaining $350 billion from the TARP bailout that Obama has also committed to spending. The budget also reserved still another $638 billion "down payment" on a new national health care entitlement that will be the biggest entitlement of all, even though we can't afford all the entitlements we already have.

If this is how to make the economy grow, then we can all just quit working and watch Obama increase spending to infinity and beyond, as Buzz Lightyear likes to say, and just borrow the money for it from foreign countries on world capital markets.

Obama's budget also proposes a trillion dollar increase in individual income taxes, including increasing top effective marginal tax rates by 20%, the capital gains tax rate by 33%, and the dividends tax rate by 33% as well. It also restores the death tax, otherwise phasing out completely under current law, to a 45% top tax rate.

The budget proposes as well a trillion dollar increase in business taxes, including a projected doubling of corporate income tax revenues in about 3 years. Also proposed is $645 billion in increased energy taxes through Obama's global warming cap and trade program. This will result in sharply increased prices for electricity, gas, and heating oil, paid by consumers.

This will all work against recovery, reducing incentives for saving, investment, business expansion and creation, job creation, entrepreneurship and work. Obama says this is okay, because the tax increases won't become effective until 2011, when he is sure the downturn will be over. But these enormous tax increases will work against economic growth whenever they occur. Moreover, they will begin to discourage investments in productive activity and start to cause further stock market declines within a year, if they haven't already started doing that. Such extreme tax increases can cause a renewed recession by late 2010 or 2011.

Moreover, little noted have been the steps already taken by the Obama Administration to shut down further oil production offshore and onshore, and new nuclear power production. There are even moves to shut down current coal-fired electricity plants. This is going to deprive America of the powerful energy industry it could and should have. Even worse, it will deprive the entire American economy of a reliable, low cost supply of energy. Instead, it will result in further increases in energy costs also working against economic growth. Expect more manufacturing to flee overseas as a result. Expect gas prices eventually to soar back over $4 a gallon, and beyond. That will be great for the economy.

What I expect is that when the recovery does come, Obama's huge deficits and government borrowing ($2.5 trillion this year alone), will cause interest rates to rise sharply. With the Fed pumping up money and credit madly, fully supported by Obama, I expect recovery to reignite inflation as well. The Fed is saying it will sharply tighten its loose monetary policies when recovery comes, to preempt inflation. But that will cause interest rates to soar further, so I expect the Fed to back off of that, out of fear it will preempt the recovery as well.

With high interest rates, resurgent inflation, and huge looming tax increases, I expect the recovery to be weak, leaving unemployment persistently high. These factors plus rising gas prices and the specter of much higher overall energy costs over the long run will likely cause a new recession by 2011, not as bad as the current one, but still bad enough to continue widespread suffering for the American people.

This will be a return to the stagflation of the 1970s, which should only be expected, since Obama is returning us to the outdated, long discredited Keynesian economic policies of the 1970s. That will even likely include the gas shortages and gas rationing of Jimmy Carter, plus the new innovation of widespread blackouts and brownouts. When Obama talked about change, did anyone think he meant going back to the brain-dead policies of the 1970s?

Almost no one recognizes that Obama's economic policies actually started a year earlier under President Bush. As Newt Gingrich explained in his CPAC speech,

The great irony of where we are today is that we have a Bush Obama big spending program that was bipartisan in its nature. Last year the Bush Obama plan had a $180 billion stimulus package in the spring which failed. It came back with a $345 billion housing package in the summer which failed. It then had a $700 billion Wall Street spending package in October which failed. It had a $4 trillion Federal Reserve guarantee which failed….We got big spending under Bush, now we got big spending under Obama. And so we have 2 new failures. The lesson I draw from this is that we have a party of the American people…that was led by Ronald Reagan and on the legislative side reached its peak with the Contract with America and the election of a majority actually dedicated to reforming welfare, cutting taxes, and balancing the budget. And there is a party of big government and political elites and tragically in the last few years the Republican Party became the right wing of the party of big government and political elites. And that is why there is a Bush Obama continuity in economic policy which is frankly a disaster for this country and cannot work.

Indeed, by the end of 2007, we had abandoned every component of Reagan's economic policies. The Fed starting early in the Bush Administration abandoned Reagan's strict, anti-inflation, strong dollar monetary policy, further fueling the housing bubble starting under Clinton's "affordable housing" policies that debased mortgage credit standards. Those policies, including Clinton's greatly strengthened Community Reinvestment Act, along with other regulatory blunders, involved a return to excessive regulation. Bush also lost control of government spending.

And when the current downturn began, Bush went along with the badly confused economic policies of his Treasury Secretary Henry Paulson and abandoned supply-side tax cuts. Instead of cutting tax rates to restore recovery, Bush and Paulson cut a deal with Congressional Democrats for a "stimulus package" based on $168 billion in tax rebates. These were effectively cash grants, identical in terms of their economic effect to Obama's $150 billion "Making Work Pay" tax credits adopted in this year's stupid stimulus bill, because they both involve no new pro-growth incentives, and they are just financed by an equivalent amount of borrowing providing no net gain to the economy on net.

This abandonment of every component of the Reagan free market economic policies is what caused the current economic crisis. Conservatives and Republicans need not waste any political capital defending that. And by this spring, the American people will be entitled to ask, how long are we going to continue to do what doesn't work?

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.