Tag: recessions

The Debt Ceiling and the Balanced Budget Amendment

The Washington Post editorializes:

A balanced-budget amendment would deprive policymakers of the flexibility they need to address national security and economic emergencies.

A fair point. Statesmen should have the ability to “address national security and economic emergencies.” But the same day’s paper included this graphic on the growth of the national debt:

National Debt

Does this look like the record of policymakers making sensible decisions, running surpluses in good year and deficits when they have to “address national security and economic emergencies”? Of course not. Once Keynesianism gave policymakers permission to run deficits, they spent with abandon year after year. And that’s why it makes sense to impose rules on them, even rules that leave less flexibility than would be ideal if you had ideal statesmen. Indeed, the debt ceiling itself should be that kind of rule, one that limits the amount of debt policymakers can run up. But it has obviously failed.

We’ve become so used to these stunning, incomprehensible, unfathomable levels of deficits and debt — and to the once-rare concept of trillions of dollars — that we forget how new all this debt is. In 1980, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 30 years later, it’s sailing past $14 trillion.

Historian John Steele Gordon points out how unnecessary our situation is:

There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.

It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer (D., N.Y.) — no deficit hawk when his party is in the majority — called it “porky.”

Annual federal spending rose by a trillion dollars when Republicans controlled the government from 2001 to 2007. It has risen another trillion during the Bush-Obama response to the financial crisis. So spending every year is now twice what it was when Bill Clinton left office. Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. They could find some of them here in this report by Chris Edwards.

In the Kentucky Resolutions, Thomas Jefferson wrote, “In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.” Just so. When it becomes clear that Congress as a body cannot be trusted with the management of the public fisc, then bind them down with the chains of the Constitution, even — or especially — chains that deny them the flexibility they have heretofore abused.

Son of the Stimulus

Like the sequel to a horror film, the politicians in Washington just passed another stimulus proposal. Only this time, they’re calling it a “jobs bill” in hopes that a different name will yield a better result.

But if past performance is any indicator of future results, this is bad news for taxpayers. By every possible measure, the first stimulus was a flop. But don’t take my word for it. Instead, look at what the White House said would happen.

The Administration early last year said that doing nothing would mean an unemployment rate of nine percent. Spending $787 billion, they said, was necessary to keep the unemployment rate at eight percent instead.

So what happened? As millions of Americans can painfully attest, the jobless rate actually climbed to 10 percent, a full percentage point higher than Obama claimed it would be if no bill was passed.

The President and his people also are arguing that the so-called stimulus is responsible for two million jobs. Yet according to the Department of Labor, total employment has dropped significantly – by more than three million – since the so-called stimulus was adopted. The White House wants us to believe this sow’s ear is really a silk purse by claiming that the economy actually would have lost more than five million jobs without all the new pork-barrel spending. This is the infamous “jobs saved or created” number. The advantage of this approach is that there are no objective benchmarks. Unemployment could climb to 15 percent, but Obama’s people can always say there would be two million fewer jobs without all the added government spending.

To be fair, this does not mean that Obama’s supposed stimulus caused unemployment to jump to 10 percent. In all likelihood, a big jump in unemployment was probably going to occur regardless of whether politicians squandered another $787 billion. The White House was foolish to make specific predictions that now can be used to discredit the stimulus, but it’s also true that Obama inherited a mess – and that mess seems to be worse than most people thought.

Moreover, it takes time for an Administration to implement changes and impact the economy’s performance. Reagan took office in early 1981 during an economic crisis, for instance, and it took about two years for his policies to rejuvenate the economy. It certainly seems fair to also give Obama time to get the economy moving again.

That being said, there is little reason to expect good results for Obama in the future. Reagan reversed the big-government policies of his predecessor. Obama, by contrast, is continuing Bush’s big-government approach. Heck, the only real difference in their economic policies is that Bush was a borrow-and-spender and Obama is a borrow-and-tax-and-spender.

This raises an interesting question: Since last year’s stimulus was a flop, isn’t the Administration making a big mistake by doing the same thing all over again?

The President’s people actually are being very clever. Recessions don’t last forever. Indeed, the average downturn lasts only about one year. And since the recession began back in late 2007, it’s quite likely that the economic recovery already has begun (the National Bureau of Economic Research is the organization that eventually will announce when the recession officially ended).

So let’s consider the political incentives for the Administration. Last year’s stimulus is seen as a flop. So as the economy recovers this year, it will be difficult for Obama to claim that this was because of a pork-filled spending bill adopted early last year. But with the passing of a supposed jobs bill, that puts them in a position to take credit for a recovery that was already happening anyway.

That may be smart politics, but it’s not good economics. The issue has never been whether the economy would climb out of recession. The real challenge is whether the economy will enjoy good growth once the recovery begins. Unfortunately, the Obama Administration policies of bigger government – combined with the Bush Administration policies of bigger government – will permanently lower the baseline growth of the United States.

If America becomes a big-government welfare state like France, then it’s quite likely that we will suffer from French-style stagnation and lower living standards.

Do Democratic Presidents Create More Jobs?

Politifact.com looked into a remark from Rep. Carolyn Maloney, D-N.Y., that “Democrats have been considerably more effective at creating private-sector jobs.”

The statement was rated true, as a purely statistical matter.  Yet the poltifact researcher did a good job questioning the significance of his own figures.  He noted, correctly, that the president usually “deserves less credit for the good times – and less blame for the bad times.”  And he added that job figures can be driven by outside factors such as oil price shocks, demographic changes or soldiers coming home after World War Two.  He wryly noted “how surprised we are that Eisenhower, who presided over the ‘happy’ 1950s, managed an anemic half-percent job growth per year, while Jimmy “Malaise” Carter finished second with 3.45 percent annual job growth.”   Anyone who remembers the runaway inflation of the Carter era will realize that annual rates of job growth are not enough to describe the overall economic situation.

The author also quoted me making the point that “timing can be hugely important.”   It is so important, in fact, that we may need to add another dimension to politifact’s true-false meter to deal with political comments that are simply meaningless.

For the record, what follows is the full text of my email on this topic:

The error involved with assigning rates of job growth to Presidential terms is that six recent Presidents took office within a few months of the start of a recession: Obama (recession began December 2007), H.W. Bush (July 1990), G.W. Bush (Mar 2001), Reagan (July 1981), Nixon (Dec. 1969) and Ike (July 1953).   As it happens, four of the five were Republicans.

One might argue that recessions launched near the end of the previous administration helped get these men elected. But these recessions were clearly left over from events that began previous years.  It didn’t help that the first Pres. Bush passed a tax increase three months after the 1990 recession began, but the start of that recession is more plausibly blamed on the earlier spike in oil prices when Iraq invaded Kuwait.

Since employment is a lagging indicator (one of the last things to improve), that means average job growth among Presidents who took office near the start of recessions is bound to look bad in comparison with Presidents who took office after an expansion was well underway.  Bill Clinton took office in 1993, long after recession ended in March 1991.   The same was true of Truman, LBJ and Carter.   JFK took office a month before the 1960 recession ended.

Two-term Presidents also have more time to show good numbers, but only if they’re lucky enough to get out of office just before the next recession starts.  Clinton squeaked by (despite falling stock prices and industrial production 2000), but Nixon, Eisenhower, Carter and G.W. Bush did not.

Since Bush 2nd began and ended office in recession, averages over 8 years outweigh 4 reasonably good years.  This unprecedented bad timing is exaggerated by Paul Krugman’s comparison of “decades” [and President Obama’s recent reference to “the lost decade” of 1999-2009] which relies on starting and ending each decade in boomy 1959 rather than slumping 1960, ditto 1969 rather than 1970, 1979 rather than 1980, 1989 rather than 1990, and 1999 rather than 2000.

In short, statistics about employment growth over Presidential terms are dominated by the timing of the “business cycle” (including Federal Reserve policy), and have no apparent connection to economic policies attributed to the White House (as opposed to Congress).

Trade Not to Blame for a ‘Lost Decade’

For American workers and families trying to get ahead, the decade just behind us was a stinker. As a front-page Washington Post story over the long weekend summarized:

For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different. …

According to the story, the Aughts (2000-09) were the first decade since World War Two with no net job creation, and the first in which median household income was actually lower at the end than at the beginning.

It won’t be long before critics of trade will try to blame the poor economic performance on trade agreements and globalization. This has been a standard line of attack, and I address it at length in my new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization. For now, just a few quick-hit observations:

The two recessions that book-ended the past decade were both “Made in the USA.” The first was triggered by the popping of the dot-com bubble, the second by the bursting of the housing bubble. Trade was not the cause of either recession. In fact, trade and globalization were charging ahead full steam in the 1990s, when everybody agreed the economy was doing well.

There is also the temptation to extrapolate short and medium trends into a long-term decline in living standards. As the Post reporter Neil Irwin rightly noted,

The miserable economic track record is, in part, a quirk of timing. The 1990s ended near the top of a stock market and investment bubble. Three months after champagne corks popped to celebrate the dawn of the year 2000, the market turned south, a recession soon following. The decade finished near the trough of a severe recession.

The U.S. economy has endured equally long stretches of poor performance in the past. For example, the Dow Jones Industrial Average was actually lower in 1982 as it was in 1966—16 years stuck in neutral. Real median household income was lower in 1983 than it was in 1969—14 years of no net gains. Yet the economy recovered and scaled new heights.

During difficult economic times, trade helps us weather the storm by offering lower prices and more choice to consumers struggling to make ends meet. When domestic demand sags, U.S. companies can find customers and profits in more robust markets abroad. Foreign investment in the United States helps to keep interest rates down, keeping more Americans in their homes and keeping credit markets open.

Our policy makers will only make our economy worse if they reach for the snake oil of higher trade barriers.