By now, the current recession is officially the longest since World War II. The National Bureau of Economic Research dates the recession as starting some time during December, 2007. The longest recession since World War II was 16 months, with the average being 10 months. By today, the current recession has clearly lasted more than 16 months.
Which raises the question, are President Obama's economic policies promoting recovery, or delaying it? Why is this the longest recession since World War II? That is a period of almost 65 years! Would other economic policies better promote economic growth?
Still No Recovery
Yes, there are signs that the economy is finally struggling out of its torpor. But the point is that the recovery is now officially overdue. It shouldn't just be showing signs of recovery. A full recovery should now be in full swing, given the historical record of the last 65 years!
Moreover, the signs of recovery are on Wall Street. But Main Street is still plunging deeper and deeper. Unemployment now at 8.5% will probably jump to close to 9% in Friday's report, the highest in almost 30 years. Unemployment in the urban areas that supported Obama so heavily is now in double digits. In New York City, the black unemployment rate for men is near 50%.
We are still losing over 600,000 jobs a month. In his press conference on April 29, Obama stated that his stimulus package passed in February "has already saved or created over 150,000 jobs." But this number is completely made up. Since the beginning of the year, employment is down by 2.5 million jobs. Obama's statement is not evidence that his economic recovery plan is working. It is evidence that the President suffers from mental delusion.
But even Wall Street is not doing that well. People are cheered because the stock market has reversed a decline that seemed to be heading towards zero under the weight of Obama's new neo-socialism. But even with that rebound, the market is still down 40% from its highs.
The testimony of Federal Reserve Chairman Ben Bernanke yesterday did point to eventual recovery, but even he said,
[T]he available indicators of business investment remain extremely weak. Spending for equipment and software fell at an annual rate of about 30 percent in both the fourth and first quarters, and the level of new orders remains below the level of shipments, suggesting further near-term softness in business equipment spending. Recent business surveys have been a bit more positive, but surveyed firms are still reporting net declines in new orders and restrained capital spending plans. Our recent survey of bank loan officers reported further weakening of demand for commercial and industrial loans. The survey also showed that the net fraction of banks that tightened their business lending policies stayed elevated, although it has come down in the past two surveys. Conditions in the commercial real estate sector are poor. Vacancy rates for existing office, industrial, and retail properties have been rising, prices of these properties have been falling, and, consequently, the number of new projects in the pipeline has been shrinking. Credit conditions in the commercial real estate sector are still severely strained, with no commercial mortgage-backed securities (CMBS) having been issued in almost a year.
Savings and Investment No, Capital Flight Yes
Indeed, Bernanke here inadvertently identifies the fundamental weakness in Obamanomics. There is nothing anywhere in Obama's economic recovery plan to promote savings and investment. To the contrary, Obama's economic policies are focused on attacking savings, investment, capital, and property rights. That is deliberate, because Obama ideologically sees savings, investment, capital and property rights as the preserve of the rich, which he opposes, and, indeed, which he actually wants to displace with big government.
Even though American companies suffer the huge international competitive disadvantage of the second highest corporate tax rates in the industrialized world, Obama continues to scorn doing anything about this as taking us "back to the failed ideas of the past." On Monday, Obama was out promoting still more tax increases on corporate America. He foolishly thinks that imposing taxes on the overseas investments of American companies will force investment back to the USA. But this is just one more whupping stick in Obama's arsenal that is going to create full scale capital flight from the U.S. before his term is over. Watch as alert, independent thinking executives start to transform American companies with investments overseas into foreign companies with tentative investments in America at least for now.
Obama's Hopeless Economics
Obama and his intellectual Minnie Mice defending his policies in think tanks, on the Internet, and on TV are expressly arguing that the way to promote economic growth is by massively increasing welfare, federal spending, federal deficits, and the national debt, to record levels, along with higher tax rates and more costly regulatory burdens. Does this sound like a promising strategy for economic growth to you? If so, you can best help your country by strictly devoting yourself to gardening, and avoiding all forms of political participation.
This is what Obama's ballyhooed stimulus package was all about. But readers of this column already know that borrowing a trillion dollars out of the private economy to put a trillion dollars of government spending back in does nothing to promote the economy on net. In particular, it does nothing to improve the incentives that govern economic growth. That is why this stimulus package will create or save exactly zero jobs.
This is also exactly what the Obama budget is all about. That budget proposed to increase federal spending for this year by an ear drum popping 34%, to a record total of $4 trillion, the highest ever. The deficit in the budget the Democrats adopted for this year is an extremist $1.7 trillion, more than 7 times Reagan's highest deficit of $221 billion, which caused so much howling among liberals and Democrats. By the tenth year under this Obama/Democrat budget policy, the deficit is still over $1 trillion. The deficit in the last budget adopted by a Republican controlled Congress, in 2006 for fiscal year 2007, was $162 billion, less than one-tenth as much as this year's deficit!
Under Obama's budget, as a result, the national debt doubles after 5 years, and triples after 10, soaring as a percent of GDP from 40% today to a record setting, neo-socialist 82%.
In his speech on the economy given at Georgetown University on April 14, Obama said, "We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity, a foundation that will move us from an era of borrow and spend to one where we save and invest." Do the Obama stimulus package and budget plan look like they are trying to rebuild the economy upon a rock, or on the same pile of sand, a pile of extreme deficits and debt, government spending and welfare? Do they look like they are moving us "from an era of borrow and spend to one where we save and invest"? Where is anything in Obama's economic policies that will promote savings and investment? Isn't this statement just further evidence that Obama is delusional, and not living in the real world?
Even Obama's tax cut for 95% of Americans is not pro-growth. It is just a $400 per worker income tax credit, less than $8 per week, which is economically the same as sending each worker a $400 check. Borrowing $400 from someone else to give you $400 does not add anything to the economy on net. Going forward you still face the exact same economic incentives as before. For a tax cut to stimulate the economy, it must reduce tax rates, which strengthens incentives by allowing producers to keep a higher percentage of what they produce. This is what all of Reagan's tax cuts did, which is why they were so successful.
Moreover, the party controlled mainstream media is cooperating in a huge coverup of the fact that the budget adopted by the Democrat controlled Congress does not include Obama's tax cut for 95% of Americans, the $400 per worker income tax credit, for more than 2 years. Obama won the election by promising over and over that he would cut taxes for 95% of Americans, and now in 18 months that will be gone.
But Obama and Congressional Democrats are continuing with their plan for a massive new tax by enacting their cap-and-trade anti-global warming scheme, imposing probably close to $2 trillion in increased costs on the U.S. economy. Consumers will pay for this through increased costs for electricity, gasoline, home heating oil, food, and any product that uses energy. This added burden will ultimately chase remaining manufacturing out of the country, sharply reduce America's standard of living, and tumble the American economy into long term decline.
Obama, however, is actually arguing that imposing these massive new cap and trade costs on the economy will promote long term economic growth. In his April 14 speech at Georgetown, Obama said,
Now the third pillar in this new foundation [for economic growth] is to harness the renewable energy that can create millions of jobs in new industries….The only way that we can truly spark the transformation that's needed is through a gradual, market based, cap on carbon pollution so that clean energy is the profitable kind of energy…. If businesses and entrepreneurs know today we're closing this carbon pollution loophole, they'll start investing in clean energy now and we'll see more companies constructing solar panels and workers building wind turbines and car companies manufacturing fuel efficient cars and investors will put money into a new energy technology and a small business will open to start selling it. That's how we can grow this economy, enhance our security and protect our planet at the same time.
So dumping $2 trillion in new costs on the economy will actually promote economic growth, because the added costs on suppliers of the proven energy sources that fuel our economy today will enable producers of the much more expensive, alternative, flower power, energy sources, based on sunbeams, the winds, and grass, to compete. No consideration in this vision for the jobs lost because energy costs in this new economy will be so much higher, or because energy supplies based on sunbeams, winds, and grass will be unreliable, or because the coal industry and other producers of traditional energy will be driven out of business. Again, is Obama mentally delusional?
And I haven't even gotten yet to Obama's tax rate increases, which will become effective at the end of next year. Top individual income tax rates will increase 20%, tax rates on capital gains and dividends will each rise 33%, and the death tax rate will be permanently restored at 45%. The expectation of these prospective tax rate increases will soon start depressing the economy, because incentives will be worsened.
Obama's shenanigans in trying to intimidate the senior bondholders in GM and Chrysler to give up their contractual rights to be paid first in favor of the more junior claims of the unions is also not helping. This will only discourage corporate lending from investors at home and abroad, and contribute to future capital flight. The auto bailouts will also be a continuing drain on the taxpayers, and hence the economy.
So, yes, I think Obama's hopeless economic policies are delaying rather than helping the economy. This is not to say that some economic recovery will not start later this year. I expect some growth to start by this summer only because the recession has gone on too long now, and this is still a fundamentally strong capitalist economy, for now. But this will be in spite of Obamanomics, not because of it.
Moreover, because of Obamanomics, I expect the growth to be relatively weak. I expect unemployment to remain persistently high, and in 2010 interest rates to rise, with renewed inflation then or by 2011 at the latest. I expect higher energy prices around then too, and an energy shortage and another recession in 2011. The expectation of future tax increases can cause higher growth this year, as people scramble to earn income now before tax rates rise, producing a more rapidly increasing stock market, which looks just 6 months ahead. But I expect another serious stock market reversal starting next year.
Gingrich's Better Alternative
Newt Gingrich has proposed a far more promising, 12-point, alternative economic recovery plan that should receive more attention. Gingrich recognizes that America's high corporate tax rates, close to 40% counting federal and state levies, leave American companies at an enormous competitive disadvantage. The EU has reduced their average corporate tax rate from 38% to 24%. Germany and Canada have reduced their corporate tax rate to 19%, with Canada's going to 15%. India and China have lower corporate tax rates as well.
Gingrich would lower the 35% federal corporate tax rate to the 12.5% rate adopted by Ireland 20 years ago, which raised that long poor country from the second lowest per capita income in the EU to the second highest. Our own Treasury Departmetn calculates that Ireland raises more corporate tax revenue as a percent of GDP with this 12.5% rate than we do with our 35% federal rate.
Gingrich would also reduce the 25% income tax rate paid by middle class families to 15%, which would create an effective 15% flat tax for 90% of Americans. He would abolish the capital gains tax and the death tax, both of which involves double taxation of savings and investment. He would reduce spending to balance the budget, as he led Congress to do in the 1990s. He would also remove regulatory restrictions to allow production of more oil, natural gas, nuclear power, and alternative energy sources, providing reliable, low cost energy supplies to power the American economy. This is a prescription for another economic boom.