WASHINGTON, October 15, 2013 — The current economic crisis and continuing “Obama depression” are turning economic definitions and models on their heads.
A decline in output for two successive quarters was once called a recession. If the economy declined by more than 10 percent or the recession persisted for two years, we were in a depression. Depressions became extremely rare once we learned to use fiscal and monetary policies to prevent them.
The National Bureau of Economic Research, an independent group of economists, decides when a recession begins and when it ends. By NBER’s definition, the great recession started in December 2007 and ended in June 2009, even though the first and second quarters of 2008 did see some small positive growth.
For each of the four quarters from July 2008 to June 2009, output declined. The recovery was anemic — we have averaged about 2 percent growth during this recovery, while we averaged over 5 percent growth during the recovery after the more severe 1981 recession — and employment has never recovered. By a trick of definitions, unemployment vanished into the lowest work-force partcipation rates in decades, while full-time work was replaced by part-time work. With the longest term rates of double-digit unemployment since the 1930s, we should refer to this period as the “Obama Depression” even though it actually started before he was elected.
We put his name on it because it is his policies that have burdened the business sector with uncertainty, regulations, higher future health care costs and higher taxes, burdened the consumer sector with higher taxes primarily from Obamacare, and burdened the investment community with over-regulations and even higher taxes on both income and capital gains. All of these have led to the anemic recovery.
The most important element of this depression is jobs. Official unemployment is currently estimated at 7.3 percent. If we add in the discouraged workers who are no longer seeking jobs because they feel it is impossible to find one, the rate jumps significantly. These people aren’t actively seeking work and are therefore not counted as unemployed. They can collect up to three years of unemployment benefits, can easily get food stamps, can be eligible for welfare now that the requirements have been relaxed and generally see a lack of opportunity.
Another unemployment rate, sometimes called “U-6,” includes discouraged workers and the long-term unemployed; it is currently above 14 percent, putting us firmly in depression-range unemployment.
A depression was believed to be virtually impossible because government can implement expansive fiscal policy — increasing government spending or cutting taxes — or monetary policy — increasing the money supply and pushing interest rates down. The reality today is that we have had the most expansive fiscal policy in history, in the process creating $7 trillion in new debt since Obama took office.
At the same time the Federal Reserve has almost tripled the money supply, pushed interest rates close to zero, and continues to create new money through its “quantitative easing” program at the rate of $85 billion every month. Yet recovery from the “Obama Depression” remains anemic. Why?
Both fiscal and monetary policy are demand side solutions. Both are intended to increase total demand in the economy. If aggregate demand rises, business should produce more output to meet that demand, and this should lead to growth. For the last four years, though, it hasn’t worked.
There are a number of explanations for that, including the idea that if you put money in the hands of individuals and businesses in a time of high unemployment and uncertainty, they will sit on cash reserves rather than buying new cars or expanding their payrolls. Whatever the reason, maybe we should look at the supply side.
In 1981 we faced a similar but worse situation. We were experiencing the stagnant economy and high inflation rates of the 1970s “stagflation.” Demand-side solutions couldn’t be used because if we took actions to increase demand, we would fuel inflation. If we took action to put downward pressure on prices — reduce demand — we would further depress output and employment, plunging us into a full-blown recession.
The solution was to take action on the supply side. By increasing aggregate supply, we would increase employment which would in turn stimulate consumption. We would also put downward pressure on prices, thereby reducing inflation.
A supply-side solution is what we need today. Policy makers are doing just the opposite. Instead of policies geared to increase supply, our policies have acted to decrease it.
To implement a supply side solution we need policies that will encourage the business sector to expand. These policies include lower tax rates on both income and capital gains, especially for the highest income earners who supply the investment capital to the economy. Also business needs to see fewer obstacles to growth. This is accomplished by reducing barriers to entry into markets and reducing burdensome and counter-productive government regulations.
Instead in the past few years we have increased income tax rates for those who provide investment capital, raised the tax rates on capital gains which directly reduces investment capital, and passed numerous laws, like Dodd-Frank, restricting businesses’ ability to grow. Worse, we’ve done this in an environment of high uncertainty, due largely to the unknowable impact of Obamacare on businesses and consumers, but also to the Obama Administration’s inability to present a coherent, long term set of budget priorities that will slow the growth of the national debt.
The correct supply side action corrective would be to make taxes — including individual and corporate income taxes as well as capital gains — lower and simpler, without special gifts for politically popular industries. Simplified and rationalized regulations would reduce barriers to business creation and make it easier for firms to predict their costs and manage risks. Coherent budget priorities and serious debt reduction would reduce fears of inflation and arbitrary changes to the tax code. All of this is achievable, it will grow the economy, reduce unemployment, eventually increase tax revenue, put downward pressure on inflation and, finally, end the “Obama Depression.”
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