Yesterday, the Bureau of Economic Analysis (BEA) reported that the economy grew in the third quarter at an annualized rate of 3.5%. Although many in the media claim this means the recession is over (and it may well be), it’s not technically accurate to make that claim yet. The Business Cycle Dating Committee, part of the National Bureau of Economic Research (NBER), is the entity charged with making the official call, and they haven’t done so yet, although all indications are that they will soon take this step.
Randall Hoven, at American Thinker, has an article out today in which he discusses some possible chicanery going on at the NBER. Specifically, the Dating Committee appears to use one method to date the beginning of the recession in order to place it as far back into the Bush Administration as possible, while, coincidentally I’m sure, using another method to place the end of the recession as early in the Obama Administration as possible. In short, it appears they may be trying to make Bush look as bad as possible while trying cast Obama in the most positive light possible. Why would they do this? Mr. Hoven notes the following with regard to the makeup of the Dating Committee:
It might just be coincidence that of the seven members on the NBER’s Business Cycle Dating Committee, one is the husband of Christina Romer, the Chair of President Obama's Council of Economic Advisors. Mrs. Romer herself was a member of the NBER's board, along with her husband, until just after Obama's election.
Quite a coincidence indeed. Read the rest of Mr. Hoven’s article
here.
While the economy may be technically recovering from the recession, the news is not nearly as positive as the mainstream media would have us believe.
James Pethokoukis, in an
article for Reuters, discusses the “anemic” recovery:
The anemic third-quarter U.S. GDP report is another indication that President Barack Obama’s economic gamble may yet fail to pay off. And that could be terrible news for Democrats heading into the 2010 midterm elections.
While the new report showed the economy shifting into recovery mode, it looks like a pretty anemic expansion. As the economics team at IHS Global Insight see things, temporary factors such as cash for clunkers (accounting for nearly half of the past quarter’s growth) and the homebuyers tax credit artificially inflated growth during the past three months. The firm puts underlying growth in the economy at closer to 2 percent than the 3.5 percent.
The cash for clunkers program and the home buyer’s credit did entice people to purchase cars and clunkers during the third quarter. But, these were purchases that would have occurred anyway in most cases. The government programs merely shifted some purchases from the future to the current. In short, the boost provided by cash for clunkers and the home buyer’s credit was temporary at best and accounted for nearly half of GDP growth in the third quarter. Incidentally, the cash for clunkers program cost taxpayers about
$24,000 per car.
Even if we assume all of the growth in third quarter GDP was legitimate and not the result of ill-conceived government largesse, how does the 3.5% rate compare to the first quarter of other economic recoveries. Not very well, according to Mr. Pethokoukis:
Indeed, during the first quarter of the last 10 economic recoveries, real GDP rose a far more impressive 5.8 percent on average. For instance, the first five quarters of the Reagan Boom coming out of the 1981-82 recession showed GDP growth of 8.1 percent, 9.3 percent, 8.1 percent, 8.5 percent, and 8.0 percent.
The tremendous GDP growth coming out of the 1981-82 recession is startling. Of course there is a huge difference in the economic policies Reagan employed in the early ‘80s compared to what Obama is doing now. Pethokoukis notes that Obama’s so-called economic stimulus plan was roughly 2/3 spending and 1/3 tax cuts (which contrasts Reagan's plan of steep cuts in marginal tax rates), but that overstates Obama’s tax cuts in terms of their effect on economic incentives to stimulate long term economic growth.
While the 1/3 tax cut proportion may be technically true in beltway vernacular, it is, at best, misleading. All tax cuts are not created equal. The kinds of tax cuts Obama promotes are only marginally more stimulative than government spending and will not add to long-term economic growth. Obama relies on tax credits and other gimmicks rather than marginal tax rate reductions. The former rewards current consumption while the latter rewards investment in productive activities which will add to the nation’s capital stock and long term growth potential.
Obama still clings (bitterly?) to his claim, first made during the campaign, that he is providing income tax cuts to 95% of Americans. That is impossible, of course, when at least 40% don’t pay income taxes at all. The only way to do this is with what are called “refundable tax credits”. Refundable tax credits allow those who don’t pay taxes to receive a refund on taxes they don’t pay in the first place. In other words, they have a negative income tax and thus receive a check from the government. This is nothing more than welfare, paid for by productive citizens who actually pay income taxes. This is nonsense. Obama’s “tax cuts” are effectively indistinguishable from government spending.
Tax cuts which actually stimulate the economy must focus on productive activity. The rate of economic growth is measured by gross domestic product (GDP), the key word being “product” or production. Pro-growth tax cuts should be designed to stimulate productive activity, not spending. After all, we don’t define economic growth as “gross domestic spending”. Obama’s policies of refundable tax credits to non-taxpayers, cash for clunkers, first time home buyer credits, etc., will have no discernable long term effect on economic activity. (By the way, isn’t the first time home buyer credit another government program designed to “assist” those who can’t afford homes to do so? I seem to recall that a plan with similar goals didn’t work out so well last year. But I digress.)
The reason Reagan’s economic recovery was such a success is because he understood that to grow the economy, we need to stimulate the supply or production side of the economy. The only way to do this is through marginal tax rate productions. Businesses and entrepreneurs must have an incentive to take risks and grow their businesses, thus adding to the country's capital stock, which raises productivity and, ultimately, living standards. I discussed this fully in a
post on the Laffer Curve a while back.
Although the economy is beginning to recover, as it always does, the meager recovery is occurring in spite of Obamanomics, not because of it. Make no mistake, there is no chance we’ll experience anything close to the robust recovery we saw as the economy climbed out of the 1981-82 recession. There is nothing in Obama’s plans to suggest he has even a rudimentary understanding of how an economy works. This is not complicated. Obama’s economic policies of large tax increases, trillion dollar deficits as far as the eye can see, a government takeover of health care, a huge new energy tax, to name a few, will not grow the economy. Quite the opposite, they'll impede its growth.
Governor Palin, in her
Hong Kong Speech, demonstrated a far better understanding of the economy and what needs to be done to grow it than Obama and his entire team of so-called economic advisors:
If you want real job growth, you cut taxes! And you reduce marginal tax rates on all Americans. Cut payroll taxes, eliminate capital gain taxes and slay the death tax, once and for all. Get federal spending under control, and then you step back and you watch the U.S. economy roar back to life. But it takes more courage for a politician to step back and let the free market correct itself than it does to push through panicky solutions or quick fixes…
If Obama followed Governor Palin's policy prescriptions, the economy would come roaring back to life just as it did after the 1981-82 recession which, by the way, was worse than the one we recently experienced. But we all know he won’t. He simply has no idea what he’s doing. The economy will continue to sputter along. Unemployment, as a lagging macroeconomic indicator, always improves slower than the economy as a whole. However, it will be even slower to recover from this recession given the anemic growth in GDP, caused by Obama’s anti-growth policies. The slow growth in the overall economy will not be sufficient to appreciably improve the unemployment rate. This is so unnecessary but, unfortunately, inevitable given the current occupant of the White House.
Read more...
Posts
