The Slowdown in the Economic Recovery-Becker

After falling rather sharply in 2008 and early 2009, American GDP grew at a good pace in the fourth quarter of 2009, but has slowed down during the second quarter of 2010. Unemployment declined to 9.5% from its peak in November 2009 of 10.2%, but has been stuck around its current level for several months.  This has led to growing fears of a double dip recession, and to a call for still greater fiscal stimulus. I do not believe that either of these is correct, and that the federal government should be concentrating on providing a good economic environment to encourage businesses and entrepreneurs to invest, hire, improve productivity, and raise longer-term economic growth of the US.

More than 60 years ago, Arthur Burns- former head of the NBER and Chairman of the Fed- and Wesley Mitchell-founder of the NBER- together wrote a classic study of business cycles called “Measuring Business Cycles”. They divided business cycles into several stages, such as the economic peak, economic decline, trough, early recovery, late recovery, and then a peak again. They clearly show that business cycles are of uneven length, depth, and severity, and that recoveries do not always proceed smoothly. A recession ends after the trough is passed, but they recognized that during recoveries an economy takes a while before it reaches and then surpasses its earlier peak. So from this perspective, the troubles the American economy is experiencing are not unprecedented, or even unusual.

Nevertheless, I agree with Posner that something is rotten about this recovery from the so-called great recession. The Federal Reserve was slow to react to the financial crisis, but on the whole the Fed’s policies since then have been decent, given the many unknowns as it tried various old and new monetary approaches to stem the financial crisis. The financial picture was quite bleak as banks greatly increased their ratio of debt to assets during the boom years, and consumers rapidly expanded their debt to income ratios during these years. So even with the best of responses the recovery probably would have been slow and uneven.

But both the Congress and the administration of President George W. Bush, and especially the Congress and President Obama since his election in 2008 made the main mistakes after the crisis hit. Instead of concentrating mainly on fighting the recession and promoting faster economic growth, the Congress elected in 2008 believed they had a mandate to radically remake the American economy. Aside from repeated attacks on American business, especially banks-some of them deserved- they not only passed various stimulus packages (that did not stimulate much), but also tried to promote a vast legislative program that had nothing to do with fighting the recession. This program was aimed at reengineering the American economy. It included radical changes in the health care system, proposed taxes on carbon emissions by companies, much larger subsidies to alternative sources of energy, such as wind power, proposals to raise taxes on higher income individuals and on corporate profits, and to raise the taxes on capital gains and corporate dividends. It also includes a movement to make anti-trust laws less pro-consumer and more protective of competitors from aggressive and innovative companies. It has as its centerpiece a financial reform bill that was a complicated and a politically driven mixture of sensible reforms, and senseless changes that had little to do with stabilizing the financial architecture, or correcting what was defective in prior regulations.

In previous posts I have laid out some of the major defects in the financial reform act, the healthcare changes, and the unemployment extension bill (see my posts for 7/25 on unemployment, 7/11 on financial reform, and 3/28 on healthcare reforms). To single out a few points of these arguments, I criticized the financial reform bill for, among other things, neglecting to do anything about Fannie Mae and Freddie Mac, two major corporations that were important factors in causing the financial debacle, and for adding an excessive amount of discretion to financial regulators who did not use wisely the discretion they had prior to the crisis. I suggested that a proper unemployment bill would eliminate most unemployment benefits for persons during the first couple of months of their unemployment, and then use the savings from that to extend unemployment benefits during bad times to a year. The most desirable reform of health care should have been to increase the out of pocket share of medical expenses borne by older persons and other individuals with various illnesses- as in countries like Switzerland- but nothing much was done about this in the new law. My detailed criticisms are available in these posts.

Perhaps the new Congress elected after November will try to reverse some of these mistakes. I would like also to see a radical reform of the tax system that returns it to the income tax structure that resulted from the Tax Reform Act of 1986 promoted by President Reagan, and Democrats Senator Bill Bradley and Representative Richard Gephardt. This Act had a maximum personal income tax rate of 28%, except for a “bubble rate” for a few families that hit 33%.

To compensate for any loss in tax revenue from these changes, and to help face the growing debt problem of the US, I would support a value added tax, but only as part of such a comprehensive reform of the tax structure. Value added taxes have many attractive incidence features that can be a valuable way to raise tax revenue in a system with low personal and corporate income taxes. However, VAT taxes also have the potential to be rather easily increased over time without close controls over such increases (see my discussion of VATs in my post on 4/25).

Government spending rose a lot during the last year of the Bush administration, and rose even more so during the year and one half of the Obama administration. Instead of introducing additional stimulus packages and further raising the cost of doing business, Congress and the President should try to create an environment where companies, both large and small, and entrepreneurs are recognized as crucial forces in a dynamic economy. Their activities can help the American economy not only grow out of the economic slowdown, but also raise its economic growth in the future that will greatly improve the well being of future generations, and help meet a dangerous future debt burden.

 

 

Comments

[Jake]

With a minor exception, Prof. Becker gets it right as usual.

Here's my quibble. Becker states that "both the Congress and the administration of President George W. Bush, and especially the Congress and President Obama since his election in 2008 made the main mistakes after the crisis hit. Instead of concentrating mainly on fighting the recession and promoting faster economic growth, the Congress elected in 2008 believed they had a mandate to radically remake the American economy."

Frankly, it is unfair, not to mention tiresome, to name former President Bush in a critique of the idiotic economic policies carried out after he left office.

[Dennis Elkvert]

Unlike most economists Mr. Becker presents many good points.

However, as a scientist, I’m always dumbfounded by how most economists seem to be missing the forest for the trees.

Without incentives to produce (i.e. with an ever decreasing personal production/reward correlation) there is no prosperity no matter what kind of macroeconomic tricks and temporary illusions economists may be able to implement. Is this such a complicated concept to formulate? Also, the typical voter reaction is to respond to economic distress by asking for state help, which exacerbates things by creating an inescapable vicious cycle. Economists should be able to take that into consideration - but I rarely, if ever, see it presented.

Sure having your healthcare paid by someone else may be nice, but are we headed in a direction where incentives to produce, innovate, engage in higher value work (for both poor and rich) are increasing or decreasing? Clearly the incentives are decreasing, so the answer about where American prosperity is headed, is obvious.

Depths of recessions, rates of recoveries, lengths of downturns etc. are just noise on the basic trend line: With decreased incentives to produce comes lower production/productivity and thus lower prosperity.

[Pradeep K]

At the same time when 3+ billion people in this world (the BRIC country citizens) finally have the freedom of mild incentives to innovate and produce, and as a result are now rising fast, the less than 1 billion citizens of the Western nations are muting their incentives to innovate and produce. The outcome should be rather obvious. Q.E.D. as the scientist above would say.

[Joshua Norman]

Jake says its unfair to name Former Presidente Jorge Wetback Bush in a critique of the idiotic economic policies carried out after he left office.
What about the idiotic economic policies of Jorge Bush WHILE HE WAS IN OFFICE?
Twice he tried to get amnesty passed with the help of the RINOs and Democrats.
He allowed over 10 million immigrants to come to this country legally during the lost decade of 2000-09.
He allowed government spending to nearly double while he was in office.
He reinstated the Mexico City Policy, which required any non-governmental organization receiving US Government funding to refrain from performing or promoting abortion services in other countries. I'm a pro-life guy but even I believe that Third World countries should been given help to control their surplus population.
Bush signed one-side free trade deals that allowed other countries access to US markets without providing access to their markets.
I don't see a dime's worth of difference between The Decider Jorge Wetback Bush and The Long-Legged Mack Daddy Barack Hussein Obama. Both are big government tax, spend & borrow statists who have their cult of personality as well as their worshipers.

[Joshua Norman]

Pradeep says "At the same time when 3+ billion people in this world (the BRIC country citizens) finally have the freedom of mild incentives to innovate and produce, and as a result are now rising fast, the less than 1 billion citizens of the Western nations are muting their incentives to innovate and produce. The outcome should be rather obvious. Q.E.D. as the scientist above would say."

Pradeep always shifts the conversation to economic freedom and liberalization. OK, I'll play along.
How does Pradeep expect America to create economic freedom and incentives to produce & innovate when they've followed his open borders advice and imported the following people?
38 million violent lazy tribal oriented collectivist mindset Negros and their descendants from Africa

35 million drunken macho caudillo worshipping Hispanics & their descendants

13 million rote learning spiritually empty conniving communist & socialist Asians & their descendants

43 million goosestepping swastika brandishing Adolf Hitler worshipping closeted homosexual Nazi Germans and their descendants.

When nearly half the US is populated by people who come from cultures that are stridently against any freedom, what kind of economic freedom do you expect the US to have?

[MAV]

So the U.S. economy's short term GDP numbers and employment are being woefully constrained by proposed legislation regarding climate change that didn't pass and didn't come close to passing - I suppose that since this prospect is currently dead, Professor Becker is now predicting a return to rip-roaring growth? Or if employment fails to pick up, we'll hear some other explanation for how consumer demand is being constrained by Obama's phantom antitrust legislation.

(or as he quaintly calls it "anti-trust", I'm guessing that's the way he must have first learned it back when hobnobbing with Senator Sherman on the Promenade at the Colombian Exposition. Stay out of that spooky old hotel down south of the Midway, things there dont' look right to me...)

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[Mark The Accountant]

I think that both congress and governments past and present have always recorgnised that creating an environment where companies both large and small are seen as crucial element in a dynamic economy. However the problem has always been how they can balance political considerations against economic practicalities. I don't see any of that changing under the present administration.

[mulp]

When are the Bush tax cuts going to create more jobs than the 20 million jobs that followed the Clinton tax hikes?

When would the Reagan Tax Reform Act of 1986 have produced the budget surplus and job growth of the 1993 Clinton tax hikes?

[Brian Davis, Austin, TX]

@Michael - Would you have preferred to spend the last 25-30 years WITHOUT the products of the U.S. national defense rebuild that actually began during President Carter's term and maximized during the Reagan years? True, we spent a lot of money but we got a lot for it. If we hadn't done it your children would be speaking English as a second language to Russian. The Reagan era developments in weaponry are still the backbone of our military preparedness. Needless to say, I miss President Reagan, a lot.

[Joshua Norman]

Brian: Does America still need to providee for the common defense of Japan, Korea, Kuwait and Europe?
Do you miss the rapid increases in domestic spending on government sponsored social programs that Reagan did not veto?
Do you really believe that the Soviet Communism was a threat to America? Soviet power was a myth. It was a country that could build missiles and space goods yet had bread lines and was unable to perfect universal indoor plumbing. Nothing worked. It was nothing but painted rust and a powerful national hockey team. The Soviets were not a threat. They were never a threat. They will never be a threat. It was a rotten, bloated cow.
However the end of the Soviet Union spelled the end of the American middle class. Take a look at Paul Craig Roberts's column. He was in your hero's administration.
http://vdare.com/roberts/100811_big_things.htm

[Brian Davis, Austin, TX]

Dr. Roberts is one of my heros. Part of the problem was that most of Washington, D.C.'s political class, EXCEPT Carter and Reagan, "misunderestimated" the Soviets' military power. I won't dispute Reagan got some help from the Taliban. America's turn could be next.

[ali0482]

nice work

[Joshua Norman]

I think what kept Reagan from making serious changes to the Beltway Washington culture was the assassination attempt by Bush family friend John Hinckley, Jr. RINO's like the Bush Family, Juan McCain, the old battleaxes from Maine have soured my opinion on the Republicans. If it wasn't for the fact that some of the Democrats are off their meds, I'd probably identify with them.

The Taliban got some help from Good Time Charlie Wilson & Ms. Cotton Bowl Joanne Johnson King Herring Davis

As for America being brought low, which threat specifically are you talking about? America faces physical harm from Arab Muslim terrorists, economic harm from China & India, and internal harm from the illegal aliens as well as the Quisling politicians at all levels of government.

If you're concerned about the Islamic threat, always remember Israel is the one country in that area of the world who can deal properly with that kind of threat.

[Jake]

By now all sentient readers of this blog should recognize that Joshua Norman has no plausible let alone constructive arguments to offer, but rather, only sophomoric complaints.

I've read the commentary by Prof. Becker and Judge Posner on this blog for years. Right or wrong, they consistently offer instructive views on current events and policy matters faced by our Republic, with a healthy focus on economics -- a sadly neglected topic these days (as evidenced by the Obama-Pelosi-Reid triumvirate currently running the legislative sausage factory).

To their credit, Becker and Posner allow open commentary on this blog. Unfortunately some commenters, like Mr. Norman, view this privilege as the equivalent of an Internet chamber pot.

[Joshua Norman]

Jake says"By now all sentient readers of this blog should recognize that Joshua Norman has no plausible let alone constructive arguments to offer, but rather, only sophomoric complaints.

I've read the commentary by Prof. Becker and Judge Posner on this blog for years. Right or wrong, they consistently offer instructive views on current events and policy matters faced by our Republic, with a healthy focus on economics -- a sadly neglected topic these days (as evidenced by the Obama-Pelosi-Reid triumvirate currently running the legislative sausage factory).

To their credit, Becker and Posner allow open commentary on this blog. Unfortunately some commenters, like Mr. Norman, view this privilege as the equivalent of an Internet chamber pot."

I have solutions to FIX THE SCREWED UP ECONOMY! You probably have seen them posted previously on other discussions. If you have any to say to me, debate me on my ideas, don't resort to childish name calling and petulant sneers.

I didn't realize you worshipped at the church of Jorge Wetback Bush and supported wholeheartedly his following policies:
Twice he tried to get amnesty for 12 million illegal aliens passed with the help of the RINOs and Democrats.
He allowed over 10 million immigrants to come to this country legally during the lost decade of 2000-09.
He allowed government spending to nearly double while he was in office.
He helped bail out automakers, banks and other financial firms using American taxpayer money to protect them for their screw ups
He reinstated the Mexico City Policy, which required any non-governmental organization receiving US Government funding to refrain from performing or promoting abortion services in other countries.
Bush signed one-side free trade deals that allowed other countries access to US markets without providing access to their markets.

[Van Gogh]

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[Pandora Bracelet]

I've read the commentary by Prof. Becker and Judge Posner on this blog for years. Right or wrong, they consistently offer instructive views on current events and policy matters faced by our Republic, with a healthy focus on economics -- a sadly neglected topic these days

[jaw crusher]

Mr. Becker presents many good points

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