The Progressive Economy
This morning, the Bureau of Labor Statistics released the latest job numbers. They aren’t good. But they’re also pretty much what anyone who doesn’t subscribe to Keynesian economics expected.
To put it succinctly, the economy sucks.
To explain why, you don’t have to look further than Adam Smith and basic supply-and-demand laws.
First, making sense of the data: according to BLS, the last two months have seen a net total of 278,000 jobs added to the economy with average wages actually declining by 0.1% over that time. The number of people who gave up looking for work outpaced those landing a job by a 4:1 margin. There are now over 94 million Americans not working, almost equaling the number of Americans who are working.
This is what the progressive version of economics has rendered: national debt now exceeds 100% of GDP, for the first time in our history. Yet despite all of that largess (which the Keynesian’s insist would boost the economy), wages continue to sag and new employment opportunities can’t keep pace with population growth. By the BLS’ own estimate, the economy needs to add 250,000 jobs per month just to match population growth; the most recent data indicates that we’ve added 222,000 too few jobs.
So how does this affect you? Well, the pressure is still on the employed, not the employer. As a result, wages either sink or stay put. If you ask for a raise, keep in mind there is somebody out there desperate enough to do your job for less than you’re earning now. Even if you’re unaware of that, your boss isn’t.
Add in the regulatory spree that progressivism claims is needed to protect you from yourself, and businesses that are already feeling the pinch of reduced demand are further squeezed. Profit margins are not some whimsical thing that can be created by government edict, as much as statists like to think so. They are very much the result of income after costs – and in a bad economy, adding more costs certainly isn’t going to improve employment, demand or prices.
So, to summarize, Mr. Obama has the economy he asked for. Oh, I know he didn’t ask for these results. But this is the real world, not some theoretical research paper written by left-winged professors, and these are the real-world results of putting those policies in action. Despite record debt (the cornerstone of the Keynesian model) the economy has seen negative aggregate demand. There are as many people without a job as have one. A large number of those people with a job aren’t getting paid enough to increase demand and thus increase employment opportunities, or wages.
In other words: the labor SUPPLY still outstrips the DEMAND for labor. Until that changes, the economy cannot be said to be in “recovery.” That is Mr. Obama’s economy.
So Much For That
President Obama’s “Son of Stimulus” (aka the American Jobs Act) is already dying the slow, tortuous death of a thousand paper cuts. And for good reason: the majority of Americans don’t buy the President’s latest smoke-and-mirrors plan. After all, stimulus was tried in 2009 and failed miserably. We were assured that spending nearly $800 billion in direct stimulus, plus billions more for “cash-for clunkers,” the automotive industry bailouts and banking industry bailouts would curb unemployment to 8% and have us under 7% by this point. More telling than the fact that was a terrible overshoot, is that nobody in the administration is willing to put any kind of number on how many jobs this latest round of stimulus would create. I doubt anyone in the White House actually believes this would really do much for the economy.
Americans intuitively understand that stimulus spending doesn’t really do much, except exacerbate the underlying cause of our economic malaise. Economists will tell you that the reason we’re in such a mess is because consumer demand – which fuels around 70% of total economic activity – is depressed. If only that were true.
The real cause for depressed sales is much more basic: people can no longer afford to buy consumer goods. They still want iPads®, flat-screen TV’s and new cell phones. But when they sit down with their bills each month, they aren’t willing to incur new debt to purchase them. After all, the debt frenzy that drove the last 20 years of economic growth met its inevitable end with the financial collapse of 2008. We’re still busy digging our way out from that mess and until the typical household reduces their debt burden, don’t expect them to begin spending again.
The same goes for government. The massive expansion of federal debt leaves Americans feeling equally queasy – after all, we just learned a valuable lesson about what happens when people and companies are over-leveraged. When public debt exceeds the total value of the economy and projected spending continues to go up, not down… Well, let’s just say we aren’t interested in finding out if an over-leveraged government can suffer the same fate as an over-leveraged household.
A failure to communicate = a failure of leadership.
One of my favorite movies is Cool Hand Luke. In the movie, Paul Newman plays the title character, a WWII hero turned petty criminal who refuses to accept that any man has authority over him unless he grants it. His nemesis is the prison warden (“Captain”) who is determined to break Luke’s spirit. During one memorable scene, after Luke’s capture from his first prison escape, “Captain” delivers the line
“What we got here is … failure to communicate”
Lately, I’ve been getting the feeling that Barack Obama would be excellent in the role of “Captain.” He certainly seems determined to break the spirit of the American people – and then blaming us for his failures. He scold us about the economy almost daily: “Well, you know, I inherited the worst economy since the Great Depression and…” Yes, Mr. President, we’re well aware of what your policies have done to the economy. You took 5% unemployment, sprinkled some of your pixie dust and
all the jobs disappeared. That pixie dust was mostly made of tripling the deficit, selling it by telling us that unemployment wouldn’t cross 8% – but without all of that extra debt, the economy would certainly tank. Fast forward 18 months to the mid-terms. Faced with a soul-crushing economy and an American people distrustful of your policies (not atypical for people who’ve been lied to), you took to blaming… not the message (something about cars and ditches) and not the messenger (because we’ve all been told what a terrific orator you are) but the American people (because we’re too stupid and too busy clinging to guns and religion to understand how good we have it). Then you seemed dumbfounded when your party and their crazy ideals of “spreading the wealth around” got chucked out on their butt.
“What we got here is … failure to communicate”
Fast forward another 8 months and once again, we’re being assaulted by daily pronouncements from the Annointed One. This time, the debt ceiling has been reached. After weeks of having our senses assaulted by your minions telling us the sky will fall come August 2nd, we’re nearly at the appointed day and time. Never mind that this sort of thing generally gets hammered out in the underground corridors of the Capitol; you had to create a crisis. The reason? Apparently to lecture us idiots on the necessity for higher taxes and more spreading the wealth around, only this time couched as “sharing the pain.” Only this time, not even the denizens of your own party are believing that straw man any longer. Every American you talk to is pretty certain that the economy can’t get much worse, but the one thing we can do to ensure that it does is listen to your proscriptions. I guess the TV performance last night was meant to scare the US populace into adopting a plan that nobody has written down anywhere (one heavy on your usual bromides), instead of allowing the House and Senate to haggle out the differences in their resolutions.
Yep, Mr. President, I’m certain that come August 3rd, you’ll be out there blaming us poor, ignorant, ordinary folk for not understanding why you’re the best thing to come down the pike since sliced bread. I’m certain you’ll be comparing your role in the debt crisis with that of Leonidas of Sparta. (You know, valiant last stands no matter the personal cost, blah, blah, blah). In reality, all this episode has proven again is that you can’t lead from behind. Oh, and that for all of your awesome rhetorical abilities…
“What we got here is … failure to communicate”
Back in the silent movie days, a popular serial involved the escapades of the Keystone Kops. They were a frenetic bunch, but ultimately so incompetent they couldn’t do much of anything. They would run this way and that, stumbling about and generally more successful at running into walls and slipping on banana peels than solving crimes. As a vaudeville act, they were hilarious. As a police force, not so much.
Watching economists from the Keynesian school is a lot like watching those old silent films. They trip over each other in explaining why the economy is moribund and what should be done about it. Never mind that everything in the Keynesian playbook has been tried (and predictably, failed). Fiscal stimulus: over the past 30 months, the federal government has pumped in $2.5 trillion over and above previous spending levels – and GDP is declining after inflation, not growing. Monetary stimulus: the Federal Reserve burned through two rounds of pumping cash into the economy. No growth, but inflation is growing exponentially each quarter. Now the Fed is planning on QE3 – pumping even more cash into an economy that has more cash than can be spent.
Keynesians love to point out that their economic theories are borne out by their successes in the Great Depression. But that assumes that those policies were successful. It seems pretty doubtful that they were. For instance, here in the US, the government did manage to achieve an aggregate GDP growth rate of 9.68% between 1933 and 1940. But in order to achieve that growth, the federal government increased spending by 110% from 1932 levels. In raw numbers, the government spent just shy of $61 billion during those 7 years. But GDP only grew by $47 billion. Remove the government spending, and the economy actually shrank by 26%. That’s a pretty dubious success.
In fact, that’s exactly what happened in 1937: Congress slashed spending, and the economy promptly declined 4.64%. Rather than create sustainable growth, all that government largesse accomplished was an economy that was reliant on government largesse. Entrepreneurship, innovation and efficiency were replaced as keys to success by graft, corruption and political machines. (There was a reason Frank Capra’s Mr. Smith Goes to Washington struck a nerve when released in 1939).
Equally important – and hugely different – from today is the amount of debt headroom FDR had when deciding on a Keynesian approach. In 1932, total federal debt amounted to 51% of GDP. By 1940, that had risen to 71%. In 2008, total debt was already approaching 100% GDP and we’ve since surpassed that.
The liberal wing of politcracy wants a return to full-blown Keynesian economics. If we go down that path, by 2020 the federal government will account for 8 out every 10 dollars spent in the US – but the government will need to borrow 9 out of every 10 dollars it spends.
Maybe our President thinks that kind of vaudeville act is one worth emulating. But I doubt many other Americans agree with him.
Spending is the problem
President Obama has finally realized the federal debt is a real problem, not something that can be pushed off for another decade or so. I’m not certain what woke him to a fact millions of Americans already understood, but welcome to the party, anyway. Unfortunately for the country, he seems obsessed with the idea that the reason our debt problem is crucial is because the federal government doesn’t have enough money.
On the one hand, the President is right when he says that federal revenues are lower than at any point in a generation. In 2011, the government is on pace to gather less than 30% of the nation’s GDP in revenue for the first time since 1983. But the reason for that isn’t because tax rates are too low – it’s because despite all of those reassurances that the economy is recovering, it isn’t. After adjusting for inflation, real GDP growth has fallen to less than 1% and is in real danger of turning negative. Add in the fact that that the economy is now 14 million jobs short of full employment (vs. 8 million when he took office), and it becomes pretty easy to see where the revenue shortfall comes from.
In traditional Democratic fashion, the President’s answer to the economic malaise has been to throw as much money as possible into the economy. The results have been disastrous. Deficit spending as a percentage of GDP during his tenure is running higher than at any point since the closing days of WWII. Since 2009, the federal deficit has averaged 9.91% of GDP, the second highest three year average over the past century. Only the period from 1944-1946 saw a higher level of deficit spending, at 24.02%. But besides the obvious (we were spending to save the world then), there are two marked differences between that period and this one:
- The US GDP accounted for close to 80% of the world’s total economic output. Europe and Asia were bombed out ruins and wouldn’t actually see real recovery for another 15 years. Africa and South America were not industrial or economic centers. Much of that debt was racked up as loans to our allies and repaid by the mid-1960’s. Today, the US is now less than 30% of world GDP and projections show us steadily losing share over the next decade. We face the prospect of having to pay much of our debt to overseas lenders, while at the same time having fewer assets with which to pay them.
- All of this new spending is taking place on top of what was already a huge debt burden to begin with. At the advent of WWI, the total federal debt – even with New Deal spending – stood at 67.62% of GDP. When the current recession began in 2007, debt stood at 85.53% of GDP. Today, we’re at 129% of GDP –the only time it was higher was from 1946-48. But by 1950, debt was down to 97.7% of GDP and by 1960, 70.51%.
The President has spent much of his time screaming from the mountain that the tax cuts enacted under his predecessor (which he voted for, by the way) are the leading cause of our current deficits. But he should re-check his math: in the 6 years after their passage prior to his assuming office, federal deficits averaged 2.04% per year – roughly one-fifth of the deficit spending under Mr. Obama. And federal revenues averaged 33% of GDP, slightly higher than the average for the previous 20 years (32.7%). So where is the discrepancy? If those tax cuts actually produced more revenue, why are deficits exploding?
The answer is completely on the spending side of the equation. Under President Bush, federal spending averaged 35.08% of GDP. Under Presidents Reagan, Bush Sr., and Clinton, federal spending averaged 34.83% of GDP. Under President Obama, federal spending has averaged a whopping 40.72% of GDP. For historical perspective, under President Roosevelt spending averaged 27.62% and under President Johnson (who also fought an unpopular war and greatly expanded social services) federal spending averaged 29.82% of GDP. In fact, the US government didn’t begin spending more than a third of our GDP consistently until the Carter administration.
In short, the President can stop with all his nonsense about needing to raise taxes. If he wants the nation to take him seriously when he says he wants to balance the budget, then he should start by simply bringing spending back down to the historical levels for the previous 30 years. That won’t solve all the nation’s economic ills, but at least that’s the starting point for a rational discussion.
Why is Everyone Afraid of the Debt Ceiling?
One of the things we keep hearing from “establishment” politicians, economists and others is that the US entered into the Great Abyss yesterday afternoon. “The sky is falling” they cry. “We’re doomed” they yell.
You see, the United States of America just crossed the Rubicon. The debt ceiling – the amount of debt Congress authorizes the Treasury to accumulate – has been reached. The great fear is that the US government is about to default on our public debt, sending the world into an economic vortex never before witnessed. Every talking head and government official in DC is warning against not raising the debt ceiling. “We’ve never defaulted on our debt” is the common cry of alarm.
I would certainly be alarmed at this outcry, except for one thing. It isn’t true. Not a single word of it. In fact, the nation has defaulted on the debt at least twice in our history. The first was in 1790, when we couldn’t service the debt we accrued during the Revolutionary War, among other things. The second was in 1933.
In 1790, the Treasury realized it could not possibly repay the outstanding loans the Federal government assumed after the ratification of the Constitution. The solution was to unilaterally rewrite the terms of those loans, reducing the interest owed and deferring payments for ten years.
The scenario most applicable to today is the one enacted by FDR in 1933. The government, faced with a debt it could not repay unless taxes were raised to incomprehensible levels and wanting to inject some life (i.e, capital) into a lackluster economy, devalued the dollar by more than 40%. The problem was that US bonds were issued in gold: you bought x amount of bonds in dollars and in return you received y amount of gold when the bond matured. The US didn’t own enough gold to cover the debt. The solution was Executive Order 6102, later codified as the Gold Reserve Act of 1934. It essentially confiscated all of the private gold holdings in the US (private citizens were allowed to have 5 troy ounces in their possession; or about $7500 worth in today’s standards).
The exact opposite of what we’ve been told by economists and politicians of all stripes happened: rather than market chaos and depression, the economy stabilized. Freed of the uncertainty spawned from over-indebtedness, the business community actually began expanding again. Yes, the Great Depression was so deep that it took additional government spending to make up for the slack in employment. But contrary to popular myth, it wasn’t the massive infusion of government capital with the outbreak of WWII that jolted the US to full productivity. By 1939, the nation’s economy was growing at 1928 levels again and by the end of 1940 had grown private sector employment to higher numbers than at the outset of the Great Depression. In fact, all of that debt from 1941-1945 precipitated a debt crisis in 1946 comparable to the one we’re now facing. Oh, and Congress took the appropriate actions then, too: they enacted a debt reduction plan that was adhered to by Presidents of both parties until LBJ’s “Great Society” spending in 1967.
Simply put: the US has defaulted on debt obligations before and the world went on as always. Look around you: the debt limit has passed, yet everything continues as on Monday. The real threat is that we continue to spend as profligately as a drunk sailor without any plan to tackle the debt. We can argue about the means to do so. We can inflate it away, as Russia, Argentina, Brazil – and the US in 1933 – did; we can unilaterally reorganize bond terms, as in 1790. We can reserve a greater share of federal revenues for debt service, as in 1946. We can even place tax increases and restructuring on the table. But scaring the citizenry about the implications of failing to to raise the debt ceiling is ludicrous, when raising the the ceiling is the most irresponsible thing the politicians now in Washington can do.