Thursday, January 16, 2014
Where is the U.S. Economy Going?—and Why
The U.S. employment news on January 10 sharply contradicted the oft-repeated refrain that economic growth was beginning to accelerate. Employers added only 74,000 jobs in December, the smallest job increase in three years and far below the 200,000 expected. The new number was well below the 182,000 average for all of 2012 and 2013 through November and less than the approximately 150,000 needed for population growth and replacing retirees.
The dismal number of new jobs was blamed in part on severe weather and increased retirements from an aging population, but too much importance should not be assigned to these factors. The really severe, record-breaking weather so far this winter occurred in early January so would not be reflected in the December figures. And the loss of jobs among prime-age workers was far larger than for older ones. Among workers ages 45 to 54, the labor participation rate dropped 0.4% to 79.2%, the lowest since 1988. For workers 55 and older, the rate was only down 0.1 percent.
The jobless rate fell to 6.7% from 7%, but most of the people responsible for the decline simply dropped out of the labor force. Less than one-third of them found a job; the rest just quit looking for one, perhaps too discouraged to continue. In December, 2.6 million workers were looking for a job for more than a year. The most significant job gains (55,000) were in low paying jobs, and 40,000 others were for temporary help. Those aren't signs of a healthy economy.
Total employment is still about 2 million less than when the recession started. That is a shocking figure, but perhaps the most shocking statistic of all is that the labor participation rate is the lowest in 35 years, going all the way back to 1978.
The graph shows that the poor performance during Obama's presidency essentially took place after the end of the recession. He took office on January 20, 2009, and the Great Recession officially ended in June 2009, according to the National Bureau of Economic Research. (The graph ends with a slight uptick as of Q3 2013, but the 1.8% gain was lost in the fourth quarter of 2013.)
Scarcely three weeks after Obama's inauguration, Congress on February 14 passed his $787 billion stimulus bill (later adjusted to $812 billion.) When Obama took office, the unemployment rate was 7.4%. The Obama administration link link promised that if the stimulus bill was passed, the rate would not exceed 8%, and Obama himself stated it would decline to 5.6% by July 2012. Instead the rate rose to 10% and remained above 9% for more than forty months.
The argument that Obama inherited a severe recession that requires a longer recovery time is without merit, says John B. Taylor, an economics professor at Stanford University. He cites the research of Michael Bordo and Joseph Haubrich of the Cleveland Federal Reserve Bank as having “blown holes in that argument.” He writes, “Recoveries from deep recessions with financial crises have been stronger, not weaker, than recoveries following shallower recessions. These strong recoveries average about 6% real GDP growth per year, compared to only 2% per year in this recovery.” With holes blown in this possible defense of Obama's record, it is clear that the blame for the poor economy from 2009 to today in 2014 rests entirely on the misguided policies of Obama.
The administration said the stimulus spending would create three to four million new jobs. Of course, the unemployment figures alone tell you that never happened. And the jobs that were created were incredibly costly and wasteful. According to the Congressional Budget Office, every job created by the stimulus program cost the taxpayers between $500,000 and $4 million.
The idea that government spending would stimulate the economy can be traced to John Maynard Keynes. He claimed government spending produced a multiplier effect through a chain reaction of additional spending in the economy. The gigantic spending of the stimulus program was sold to Congress on the basis of a Keynesian multiplier of 1.5, meaning the GDP will increase by $1.50 for every dollar of government spending. But in my new book, The Impending Monetary Revolution, the Dollar and Gold, I point out that extensive research has shown the Keynesian multiplier is always less than 1.0. That means the money that is spent over and over again in the private sector from the government spending is always less than the cost of the programs. If it weren't, the U.S., Greece, and other spendthrift countries wouldn't be going broke—they'd be getting richer the more they spent! My book quotes Brian Westbury, former chief economist for the Joint Economic Committee of the U.S. Congress, who wrote “the larger the government share of GDP, the higher the unemployment rate. In other words, when it comes to jobs, government spending has a multiplier of less than one—government spending destroys jobs.” Also, Harvard Professor Robert Barro, who has studied Keynesian multipliers as thoroughly as anyone, concludes, “There is no meaningful theoretical or empirical support for the Keynesian position.”
Franklin Roosevelt adopted Keynes' economic ideas to try to pull the country out of the Great Depression of the 1930s, but extensive research has shown the opposite effect: they prolonged the depression. It should not be a surprise that similar policies by Obama produced similar effects regardless of promises of “hope and change” and exclamations of “Yes we can!”
The futility of the Keynesian approach was explained to the House Ways and Means committee late in FDR's second term by his treasury secretary and good friend Henry Morgenthau Jr. On May 9, 1939, he testified: “We have tried spending money. We are spending more than we have ever spent before and it does not work....After eight years of this Administration we have just as much unemployment as when we started....And an enormous debt to boot.” In May 1939 the unemployment rate edged above 20%.
Hunter Lewis, author of the book Where Keynes Went Wrong, says, “There is no evidence” that spending ever cured a recession, and Keynes “wasn't particularly interested in evidence.” Keynes believed spending—for anything—was the driver of the economy. He even endorsed printing money with expiration dates so people would be forced to spend it. That, of course, would destroy savings, leaving the people unable to provide for their future (and dependent on the government), and eliminate investments needed for economic growth. Lewis says Keynes
suggested that the government could print new money. That money would flow into the economy in the form of debt, and that would take the place of savings, but there is just no evidence for that at all, there is no logic behind that. In fact, if you want a good economy, what you need is savings, and you need then to invest those savings, and you need to invest those savings in a wise way...Of course, Keynes completely ignores the issue of how you are investing. For him, not only is any investment equivalent to any other investment, but spending is equivalent to investment. (Emphasis added.) link
Of course, if that is the case then it is unimportant that every new job from the stimulus program costs $500,000 to $4 million. That investment is as good as any other. If that doesn't work, print more money. The important thing is the spending. In an article in Redbook magazine in 1934, in answer to the question “Can America spend its way into recovery,” Keynes answered, “Why, obviously, the very behavior that would make a man poor, could make a nation wealthy.”
Keynes intent was “positive social improvements,” namely, the redistribution of wealth. In his 1940 book, How to Pay for the War, Keynes wrote, “I have endeavored to snatch from the exigency of war positive social improvements. The complete scheme now proposed...embodies an advance toward economic equality greater than any which we have made.” (emphasis added.)
You can see why Keynes' ideas are so appealing to Obama, who in December 2013 declared economic inequality is the “Defining challenge of our time...That’s why I ran for president....It drives everything I do in this office.”
On the floor of the Constitutional Convention on June 26, 1787, Alexander Hamilton declared, “Inequality will exist as long as liberty exists. It unavoidably results from that very liberty itself.” Our Founding Fathers chose liberty; Obama has chosen economic equality—necessarily at the expense of liberty. When he told “Joe the plumber” during the presidential campaign in 2008, link “I think when you spread the wealth around, it's good for everybody,” he was advocating the redistribution of wealth at the expense of not only Joe's liberty and property but of his inalienable right to use his own money for the pursuit of his own happiness. The Founders expected property rights to be the principal means for exercising that right. The distribution of wealth was to be determined not by force but by freedom, not by government but left to the people to determine for themselves by exercising their rights. It would be whatever distribution results from the labor of free men and their free (voluntary) exchanges with each other. A free-market economy is the only one appropriate for a free people.
The word “liberty” is mentioned in both the Declaration of Independence and the Constitution. The former says it is an “unalienable right” in the famous phrase that links it to the rights to life and the pursuit of happiness. The Premable of the Constitution gives “to secure the blessings of liberty to ourselves and our posterity” as a reason to “establish this Constitution.” Nowhere do either of these two founding documents of our government mention economic equality or redistribution of wealth. The “defining challenge” of our time is not economic inequality. It is preventing people such as Obama from perverting his office and our Constitution and making the U.S. more representative of Karl Marx's class warfare and his dictum “From each according to his ability; to each according to his need” than to the ideas of our Founding Fathers.
The “transformational change” Obama promised has been very expensive. Regulations have proliferated. On August 1, 2013, Sam Batkins, director of regulatory policy at the American Action Forum, testified before a congressional subcommittee that “major” regulations (those costing $100 million or more) and the amount of federal paperwork “have increased significantly over the last five years.” He also said that delays are often the result of “hundreds of new requirements from Dodd-Frank and the Affordable Care Act [Obamacare].” He noted, too, that there are more than 9,100 different collections of information for managing the regulatory programs.
In 2010 Congress passed 129 private-sector mandates, the highest ever recorded. In addition to recording the sheer number of mandates, the Congressional Budget Office records whether mandates exceed the statutory threshold (currently $150 million) under the Unfunded Mandate Reform Act. In 2010, Congress passed 25 mandates that would likely exceed the statutory threshold, easily the highest figure on record and more than triple the yearly average from 2002 to 2008. In 2011 more than 340 regulations (“major” as well as lesser ones) were proposed, and the Federal Register noted that more than 4,200 others were in the pipeline.
The CBO also tracks the unfunded mandates on states and local entities. In 2009 and 2010 there were 116 of these unfunded mandates.
Batkins noted, “It is clear that current regulatory burdens have legislative roots of historic proportions. These figures on mandates are important because they eventually become federal regulations and translate into real costs for private entities and states.”
In addition to tracking mandates and rulemakings, the American Action Forum tracks the paperwork burden imposed by federal agencies. “Based on our current data for 2013, the federal government has imposed 85 million paperwork burden hours...[and] Americans spend more than 10.34 billion hours annually completing federal paperwork. The supposed cost for this paperwork is $72.8 billion, or $7.04 per hour, less than the federal minimum wage. There are two other measures to monetize the nation’s 10.34 billion hour burden: the median wage of a 'compliance officer' ($31.23) or the real Gross Domestic Product per hour worked ($60.59). Using these two figures, the monetized burden of federal paperwork ranges from $322 to $626 billion annually. These figures include only the paperwork costs of regulation, not deadweight losses or other capital costs.”
“It is undeniable that federal red tape is growing, and will likely continue to trend upwards with the implementation of the Affordable Care Act and Dodd-Frank. Based on the most recent Information Collection Budget of the U.S., the federal government added 355 million hours in the last fiscal year. To put this figure in perspective, assuming a 2,000-hour work year, it would take 177,500 employees to comply with the new paperwork. Added regulatory burdens, however, should not be thought of as a jobs program.”
The Office of Information and Regulatory Affairs reported that 2012 was the costliest year on record, at $29.5 billion (in 2001 dollars) and surpassed the second highest total by 57%.
Duplication resulted in huge costs. Based on 17 areas of duplication, the AAF “found 642 million paperwork hours, $46 billion in costs, and 990 forms of federal overlap. For example, ten different agencies are involved in renewable energy programs and produce 96 related forms.” There were more than 600 different forms relating to veterans' claims, “imposing millions of paperwork burden hours.”
All of these regulatory measures cost a great deal of money. They impose enormous costs on the private sector, making it increasingly difficult for the economy to grow. But the largest and most dangerous cost is the one that will be paid by everyone for the destruction of the dollar through Keynesian spending by the government and Keynesian printing of money by the Federal Reserve. In his first term of office, Obama added as much to the national debt as all the presidents from George Washington through George W. Bush combined. In the fifteen months following collapse of the housing/mortgage bubble in 2008, the Fed created more money than in all the years combined since 1913 when it was founded.
The recent 19-day partial shutdown of the federal government over raising the national debt ceiling shows it is politically impossible to avert the coming disaster. The fight over the debt ceiling was not about actually cutting government spending—making government live within its means—but about raising the debt ceiling so spending could be increased.
Obama had previously appointed a bipartisan National Commission on Fiscal Responsibility and Reform, headed by Erskine Bowles and Allan Simpson, both highly respected. This sounded good. It allowed the president to pretend he was serious about the problem. He even promised, “Once The Bipartisan Fiscal Commission Finishes its work, I will spend the next year making the tough choices necessary to further reduce our deficit and lower our debt. link." That promise was worth as much as his promise that people could keep their health insurance. That he was insincere about promising to reduce the debt was evident when it came time for dealing with the budget deficit and the national debt ceiling. He totally ignored his NCFRR commission's calls for immediate and steep cuts and instead insisted on further increases in spending. Finally, the Republicans, anxious to avoid another government shutdown, agreed to a $1.1 trillion spending bill that would pile another $45 billion onto the $17 trillion national debt. The agreed compromise does nothing to reduce government spending, merely kicks the can a little further down the road.
Continuing to increase federal spending is far more serious than might appear. More is at stake here than simply passing a huge cost onto our children and grandchildren—which would be bad enough in itself, and immoral as well—but the problem is worldwide. Every central bank in the world is following the same Keynesian policies, which aren't working, but they keep doing them anyway. The Fed, the European Central Bank, and the central banks of Japan, Switzerland and China have printed an astounding $10 trillion since 2007, tripling the size of their combined balance sheets. To expect governments to repair the economy is to expect the cause to be the cure.
The U.S. has not—yet—suffered the same results for its extravagant spending as, for example, Greece because of the dollar's status as the world's reserve currency dating from the Bretton Woods Agreement in 1944. The dollar became the basis of international trade, but that status is being threatened by a loss of confidence because of our debt. Countries are starting to abandon the dollar as an intermediary in foreign trade, turning instead to other currencies and gold. China and Japan, the world's second and third largest economies, have agreed to trade in their national currencies, the yuan and the yen, instead of using the dollar as an intermediary. Russia and China trade is in rubles and yuan. India no longer buys Iranian oil in dollars but in rupees. India and Japan have signed a new $15 billion currency swap. Brazil became the first South American country to sign a currency swap agreement with China, bypassing the dollar. Reuters has reported, “France intends to set up a currency swap line with China to make Paris a major offshore yuan trading hub in Europe, competing against London.” South Africa, Venezuela, Germany, Cuba, Pakistan, Argentina and others are said to be set to join currency arrangements for trading without the dollar. link
The BRICs (the large developing nations Brazil, Russia, India and China) are said to have agreed to trade in other currencies and periodically settle differences in gold. You can hear this and other interesting comments by Karen Hughes at Karen Hudes Predicts "Permanent Gold Backwardation" . She is a woman with 20 years experience at the World Bank, where she was general counsel. She is no longer at the bank, having departed after being a whistleblower on corruption at the bank.
In my book I noted that the argument put forth that 85% of foreign exchange transactions being denominated in dollars means the dollar won't be displaced for a very long time. But that 85% figure developed from the dollar's relative stability and safety over many decades. I wrote that the 85%would erode as people lost confidence in the dollar and that people will likely be surprised by the suddenness of its ultimate collapse. Now the movement away from the dollar is already underway and proceeding faster than I expected.
I shall close with mentioning an article on the problems facing the Federal Reserve, by Phil Gramm and Thomas R. Saving. Gramm, a Ph.D. and former U.S. senator, was a university professor of economics before turning to politics. Thomas Saving,Ph.D., is a professor of economics at Texas A&M university. Their article is quite technical so I won't discuss it here. If interested, you may find it at link. I shall only quote their ending: “The full bill for this failed policy has yet to arrive. No such explosion of debt has ever escaped a day of reckoning and no such monetary surge has ever had a happy ending.”