Monday, June 20, 2011

To Obama: The Bump In Our Economic Road Is Not A Bump And It Was Clearly Predictable

If you listen to Obama and his soon-to-be-leaving chief economics adviser, Austan Goolsbee, the rise in last month's unemployment rate is just a bump in the road in an economy that they believe to be recovering. But, from my perspective -- and based on the facts that I will present -- that "bump" is more than just a bump. Instead, the rise in the unemployment rate was representative of a 2010 slowdown in the entire economy; and, a slowdown that was easily seen coming. All one had to do is simply look at the track of the nation's Gross Domestic Product (GDP) since the 4th quarter of 2009 to know that our economy wasn't firing on all cylinders. What's worse, the rapid recovery that had been previously seen in Obama's first year in office was actually being destroyed throughout 2010 and now, again, in 2011 as more and more stimulus funds were being dished out; creating massive amounts of national debt and a heavily devalued U.S. dollar. As a result of the dollar's fall, there has been rising inflation in both food and energy costs. As a consequence, this inflation was draining the consumer of their discretionary spending money that would otherwise be put to use in non-food/energy purchases and which would effectively fuel our economy back to a healthy recovery. This is a common problem with any Keynesian-style stimulus in an economy that imports far more than it exports and in one that gets 70% of its economic activity from consumer spending. In fact, the spending policies of Obama and the Federal Reserve have resulted in a 21% loss in our dollar's value in less than 2-1/2 years. In all of the 10 years prior to the Obama presidency, the dollar only lost 17% despite the billions being spent on two wars and the billions spent in the post-9/11 beef-up in our nation's security in federal buildings and in the formation of Homeland Security and the TSA.

To support my conclusions, I need only to present two charts:

Chart 1. Real GDP Reporting by Quarter from a negative 6.8% GDP in the 4th Quarter of 2008 to a positive 5% growth in the 4th Quarter of 2009. A Linear Regression Trend Line is overlaid to reflect the "steepness" of that recovery.

As you can clearly see from the trend line on the above chart, the economy was very much on the mend with GDP improving in each quarter of 2009. Also, you should note that there was nothing done by the Obama Administration in the first half of 2009 that would account for this easily seen economic reversal in that same year. After all, the initial stimulus funds didn't start going out the door until August of 2009. Furthermore, much of that stimulus funding wasn't actually applied to the economy until well past that date due to project delays associated with having to rebid many projects as Federal projects (requiring federal work rules and union labor) and due to the lack of either permits from local or state governments or, when applicable, project approval from the EPA. Recently, President Obama, himself, referenced those delays when he uttered these now-infamous words while some members of his Job Council just laughed: “Shovel-ready was not as ... uh ... (as) shovel-ready as we expected.”

Chart 2. Real GDP Reporting by Quarter from the 4th Quarter of 2009 at a 5% growth rate to the 1st Quarter of 2011 were the economy had slowed down to only 1.8% growth. Again, a Linear Regression Trend Line is applied; this time, to reflect the slowdown.

Obviously, the Stimulus didn't work. We actually had better performance in 2009 before any stimulus spending was ever applied. Once again, Keynesian economics has failed to produce the expected results. It failed during the Great Depression under FDR where Europe recovered much faster without Keynesian spending. It failed in the so-called "Lost Decade" (now 2 decades) in Japan where Keynesian-style stimulus was also tried a number of times to kick-start their economy. In fact, I'm not aware of any instance where the demand-side application of Keynesian economics has ever really worked. That's because Keynesians falsely assume that the economy is like some simple windup toy that can be given a few turns on the winding key (through massive government spending) and the economy will, like magic, take off again. But, this fact has never been proven to work. Yet, liberals/progressives just keep trying to make it work; over and over, again, and to no avail. They just can't help themselves. That's because they all believe that John Maynard Keynes had handed them the greatest gift that a liberal or progressive could have ever received: A macro-economic theory that gives them a license to spend, spend, and spend, again, without a care about the debt and the subsequent inflation they are creating!

And, when they are through creating massive deficits, they just want to raise taxes again to fix the mess they created. History saw this ugly fact in 1937 under FDR when taxes were raised and, as a result, the economy took another nose dive after looking like it just might be recovering. Obama has already stated that he wants to tax the millionaires and billionaires who make more than $200,000 for unmarried filers and $250,000 for those married and filing jointly to reduce the massive deficits he has created. If so, I think we'll easily see 1937 all over again.

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