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Obamanomics at 22 Months

USA Today reports on the state of our economic recovery as compared to other recessions in our nation's history. As the chart below displays (by showing recovery rates 22 months after each recession formally ended), this "recovery" is the worst in history.

Several factors, no doubt, contribute to our present misfortune. But one cannot ignore Obama's egregious and unparalleled stimulus spending. Government spending is pretty much inversely proportional to job growth. This is partly because a great deal of stimulus cash was funneled to Democratic constituencies or immediately circulated into government coffers to pay off state debts, rather than being applied to private contracts which might have "stimulated" the economy. However, the overarching explanation is that Keynesian economics is bunk and uncontrolled government spending ruins economies.

While true believers will argue ad infinitum that external factor explains Obamanomic's failure to launch, the experiment cannot be said to have failed for lack of trying. Obama has spent with reckless abandon and promised to keep the tap flowing. It's hard to imagine anyone seriously arguing that we should (or could) have spent more money than we have. And the result it evident.

Albert Einstein's famous quote seems to apply. "Insanity: doing the same thing over and over again and expecting different results." An Obama victory in 2012 would reveal either that American's have no knowledge of the facts or that they meet the criteria of Einstein's definition.  

Categories > Economy

Discussions - 26 Comments

I would refer you to the public writings of Kenneth Rogoff. Economic recoveries from recessions induced by financial crises are commonly slow. That is not the President's doing. I would also refer you to some of Casey Mulligan's writings on labor use. Per Mulligan, none of the economic literature (formal and informal) that he has been surveying has included a model which adequately explains the fall in demand for labor over the last three years.

The problem with the stimulus is not that Keynesian economics is 'bunk'. The problem has been, by appearances, that 1. the economy had stabilized before the stimulus spending took effect and 2. the multipliers associated with public spending are quite low if the degree of economic slack is below a certain threshhold. One economist said as the stimulus was being enacted that the fragmentary data that was on hand indicated that the multipliers would be below unity if the antecedent unemployment rate was below 12%. That proved to be the case.

The stimulus itself accounts only about 20% of the additions to the public debt in recent years. You also have the TARP program, general increases in the budgets of favored agencies, momentum in the form of interest charges on previously contracted debt, demographic pressure as larger postwar cohorts replace smaller Depression-era cohorts amongst the population of retirees, and a serious drop in revenue collections. Currently, the ratio of revenue to expenditure is about 0.6, so you are not going to get out of this without tax hikes.

I suspect that he is doing the same thing FDR did - locking us into semi-permanent recession/depression through parasitic government spending. But go ahead, spin it anyway you'd like. Just remember that governments don't produce anything. The best they can do is buy stuff from people who do produce things. It's a redistribution of spending at best, and at worst it's a crippling of productive forces to feed a parasitic class of paper-pushers and legal eagles.

Justin?..... Justin?? You there??

Once more with feeling:

There was no 'semi-permanent recession/depression' during the Roosevelt Administration. The economy recovered quite rapidly between the spring of 1933 and the end of 1936. There was an economic contraction which ran from the beginning of 1937 to the middle of 1938 after which the economy expanded rapidly until the end of the war. (IIRC, the ratio of federal deficits to domestic product prior to 1942 was considerably lower than it has been in recent years). By the end of 1936, total real output was quite near what it had been in 1929; by 1941, per capita income exceeded 1929 level by about 15%. The trouble you had during the Depression was that this recovery was starting from an abnormally low base (a 27% decline in real output over the period running from the summer of 1929 to the spring of 1933) and the labor market was slow to recover and clear. The Roosevelt Administration gave priority to repairing the financial system and did so with legislation whose page numbers were in the lower three digits. They also promoted other policies which were ill-timed (social insurance financed with payroll taxes), bad (high minimum wages and the aborted attempt to erect cartels in each commercial and industrial sector), or suboptimal according to timing or structure (industrial unionism).

Much of the growth from 1935 through early 1937 can be attributed to a desire on the part of manufacturers to boost production before the cost of labor was expected to soar under the Wagner Act. The fact that growing European political instability led foreign investors to send huge amounts of hard currency to the United States also had something to do with it.

The Wagner Act was passed in 1935. The rapid grown antedated and post-dated its enactment. The abrupt change in the dynamics of the economy was coincident in time with the bank holiday, the devaluation of the currency, the suspension of gold clauses, and the Glass-Steagall Act. It was not co-incident with the Wagner Act. You do not say where you got your figures on foreign investment. The international situation grew more uncertain in Europe after 1936, but intramural political crises (bar in Roumania and Spain) occurred prior to that.

Approximately $5.5 billion in gold found its way into the Federal Reserve in the mid-1930s, $2 billion from France alone.

Source: Charles H. Feinstein, Peter Temin, and Gianni Toniolo, The World Economy between the World Wars (Oxford: Oxford University Press, 2008).

On the effects of the Wagner Act, see Charles Kindleberger, The World in Depression, 1929-1939 (Berkeley: University of California Press, 1986).

Gross domestic private investment (in nominal terms) reached its nadir in 1932 at $1.3 bn. Over the period running from 1933 through 1939, Gross domestic private investment amounted to about $49 bn. Given a baseline of $1.3 bn per annum, that would amount to a supplementary increment of $40 bn. An additional increment of $5.5 bn in net foreign investment, accounting for 13% of total private investment, would have been helpful but no more than helpful.

Hence the phrase "had something to do with it."

Also, Robert Higgs suggests that net domestic private investment, rather gross, provides a more accurate picture of the recovery.

"In 1929, when gross private investment was $16.2 billion, net investment was $8.3 billion. Net investment fell

precipitously to $2.3 billion in 1930 and then became negative during each of the following five years. In the period of 1931 to 1935, net investment totaled minus $18.3 billion. After reviving to positive levels in 1936 and 1937, net investment again fell into the negative range in 1938 ($0.8 billion) before resuming its recovery. For the eleven-year period of 1930 to 1940, net private investment totaled minus $3.1 billion. Only in 1941 did net private investment ($9.7 billion) exceed the 1929 amount."

And what was the unemployment rate during this period of time? Did it ever once go below 10%? I think that's why they called it "The Great Depression," and it wasn't nearly as bad in other parts of the world. Thank you, FDR.

Production is irrelevant if it doesn't employ people (kind of like our jobless "recovery" in the last couple of years). Democrats seem to specialize in this because they are corporatists at heart, always backing the big corps and letting the little (job-producing) companies languish under increasing taxes and regulations.

No it does not. Domestic product per capita and unemployment rates, not investment levels, are the salient measures of economic well-being. The utility of investment is that it generates goods and services for people to consume (or generates capital goods which generate consumer goods). Heavy reliance on foreign borrowing is troublesome, but we were not running serious balance of payments deficits on current account at that time. 'Net investment' refers to gross investment less depreciation. Capital goods and structures financed through foreign investment depreciate too.

Unemployment under contemporary definitions averaged 18% during the years running from 1929 to 1941. After 1932, some portion of the idled labor was stashed in agencies such as the Civilian Conservation Corps and the Works Progress Administration (but still counted as 'unemployed'), which were generally low-productivity outfits. And, no, the production is not useless in circumstances of high unemployment. The society of 1941 was a more affluent society than that of 1929, but it was a society where consumption was comparatively maldistributed due to the dysfunctions in the labor market.

By many accounts, it would have been helpful had the Hoover and Roosevelt Administration had not attempted to persuade commercial and industrial kingpins into maintaining nominal wages at 1929 rates, had the Roosevelt Administration not attempted to erect cartels across the whole economy, had the Roosevelt Administration not promoted anatagonisic industrial relations on the Gompers-Lewis model, and had the Roosevelt Administration not attempted to enforce a minimum wage that priced a huge slice of the labor force out of the market. (Keep in mind, though, that Margaret Thatcher's ministries did none of these things and Britain still suffered elevated unemployment levels for fifteen years or more).

Time for another stimulus package. Since the first one worked so well, the bus driver in the WH should just issue another one. We can just go into debt another trillon or so. This would create more jobs, bring us out of debt, lower food prices and gas prices.

What to think when lunatics like Paulette are accusing others of insanity ...?

Read this. Please. All of you:

Oh. Sorry. You won't. Why would you? It doesn't agree with you and so it logically follows that it's liberal and compromised. Silly me.

Sorry Craig. Just another indication that Mr. Weisberg lives and works in a bubble.

Started to read it. Stopped on the sentence that involved the goo-man theory vs. creationism. When liberals are losing they restort to name calling, racism and people's personal beliefs. Oh hmmmm. Very boring Scanlon...

As I said, semi-permanent recession, and all because these liberal nitwits don't understand the first thing about economics (envy and spite are not economic principles). Capitalist economies are not and never have been about distribution or justice - they are about making money for their smartest and hardest-working elements. The fact that this dynamic does spread the wealth around to some degree is a plus (see Adam Smith), but it's not the central dynamic (nor can be).

Of course, there are lots of ways to game the system (e.g., government-mandated cartels, casino capitalism), but those are problems to be solved, not subsidized. Obama suffers from the illusion of control and "purpose," and that will sink us all.

Sorry, ill considered social policies do not a 'semi-permanent' recession make. We had buoyant economic growth and generally low unemployment rates during the period running from 1949 to 1973, ill-considered social policies and all. Social policies are not the only influence on economic dynamism.

As for nitwits, Ralph Nader and Barney Frank may miseducate their constituency and injure the public weal, but quite a run of people do one or the other (Arthur Laffer and Ron Paul, to name two).

Very true. After WWII American business owned about 75% of global trade (our competitors, Europe and ultimately Japan, were on their knees). During the heyday of the American dream we could afford stupid fiscal and monetary policies. But AD, that period if long over. We certainly would have had a semi-permanent recession if the last election had reinforced Obama's legislative strength. As it is, we have a chance at growth because small and medium-sized businesses may begin to believe they are safe from draconian policy prescriptions. Unfortunately, every time the economy shows signs of life the gasoline prices go through the roof ('investors' assuming that strong demand will return). Right now this is the single greatest source of weakness in the economy, and someone had better fix it right quick (although I won't be holding my breath).

European reconstruction was largely complete by 1958. As for stupid fiscal policies, it was not the practice to run deficits year in and year out without regard to external circumstances until after 1960. Even so, Lyndon Johnson's last budget was balanced; there wouldn't be another one for 30 years. As for stupid monetary policies, the Federal Reserve bit the bullet and acted so as to stabilize prices in 1951-52, and they remained fairly stable for the next 15 years. The chairman of the Federal Reserve resisted Lyndon Johnson's importuning to hit the monetary accelerator in 1965-66. He then gave in and we had 14 years of escalating inflation. LBJ's work was a gift that just kept on giving.

I don't necessarily disagree with any of that. I do think there has been an enormous amount of scholarly rethinking of FDR's role in "saving capitalism." The fact is, I think the man took what would have been a deep but relatively brief recession and turned it into a depression (of course, he had help from Hoover). Boom and bust cycles are part and parcel of capitalism, but politicians always want the boom and not the bust. Unfortunately, their "fixes" often dampen the booms and lock in the busts.

If we want the flexibility and dynamism of a natural (i.e., spontaneous, emergent-ordered) system like capitalism, we have to be willing to accept the bad along with the good. Unfortunately, I don't see any political will to do that.

There were some ill-advised policies followed by the Roosevelt Administration, but the primary economic contraction the country suffered came to a conclusion in the spring of 1933. Nearly all the damage was done before he took office. Year over year changes in real gross domestic product were as follows:

1929/30: -8.6%
1930/31: -6.2%
1931/32: -13.1%
1932/33: - 1.3%

The more granular statistics on industrial production indicate the economy's decline was rapid and monotonic, bar a 4 month pause running from December 1929 to April 1930 and a two month pause in early 1931. An economic recovery which began in the summer of 1932 was aborted when a banking crisis erupted in November of that year. From 1933 to 1945, the economy grew consistently and rapidly, bar the period running from the beginning of 1937 to the middle of 1938.

Pres. Hoover did three unadvisable things: he attempted to persuade the commercial and industrial leadership not to cut nominal wages, he signed the Smoot-Hawley tariff into law, and he proposed a tax increase in 1932 which was enacted. The United States in 1929 exported only about 5% of its domestic product and collected in taxes and tolls only about 3% of domestic product. Smoot-Hawley &c. would have had ill-effects but contextually modest ill-effects, and, in any case, the tax hike went into effect afternearly all the damage had been done to the economy. It is difficult to imagine the President's jawboning had much effect on how these kingpins ran their businesses, but who knows?

I think there may also have been a regulatory change during the Hoover Administration which applied to national banks and/or to the Federal Reserve's member banks which required higher reserve ratios. That would also have been injurious.

Growth in GDP that does not influence employment is useless from a social and political point of view. It's true that FDR's policies (perhaps) brought unemployment down from 25% to 10% by 1937, but by 1938 it was right back to 20% (that shouldn't be blamed on Hoover, but on the straightjacketing of the economy by FDR). And how much of that "employment" was sustainable (not just make-work via the WPA, etc)? Unemployment did not return to anything like normal until war production and mass enlistments drained the unemployed reserve army.

The new thinking is that the recession/depression of 1931/32 could have come and gone as quickly as the massive recession of 1920 IF the economy had been allowed to heal itself. If Obama would leave well enough alone, stop spending money (and threatening to tax the hell out of peopole), and of course fix the stupid futures markets, we'd have 6% unemployment by now.

The unemployment statistics of the day are the sum of those completely out of work and those on the rolls of the Works Progress Administration and other agencies.

The labor market one may wager would have healed more quickly had certain measures not been undertaken. The notion that the economy as a whole would have healed in the absence of policy innovations is at odds with what did happen. Aside from some adjustments in import duties, passivity was the order of the day in response to economic conditions until the early spring of 1932. By that point, the economy was already in a state of ruin. Industrial production and securities prices reached their nadir in July 1932. A rapid recovery did begin - when the Roosevelt Administration closed the banks and conducted a rapid inspection of the books, devalued the currency, suspended the convertibility of the dollar into gold, annulled the gold clauses in contracts, commenced inflationary increases in the money stock, and sought and got legislation amending the regulatory architecture governing the financial sector. Britain's economic recovery began about a year and a half earlier coincident with the abandonment of the gold standard and the devaluation of the pound. That's what happened. Deal with it.

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