The Recession Debate Misses the Point

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The state of the U.S. economy remains a contentious issue among economic commentators. Some argue we are and have been in a recession for some time, while others argue the economy never was contracting and won’t in the future.

When we consider that a lot of the discussion hinges on GDP data points, it could more realistically be argued that the discussion is pointless. That is so given the misleading nature of Gross Domestic Product (GDP) calculations.

Indeed, thanks to weak-dollar driven price increases after the 1971 collapse of Bretton Woods, real GNP under Richard Nixon grew 8.8 percent in the first quarter of 1973. Not long after, Nixon was forced out of office. The weak dollar also led to impressive GDP growth during Jimmy Carter’s presidential term despite economic realities that suggested a very unhappy electorate when it came to the economy.

GDP growth was high under Presidents Reagan (32%) and Clinton (31%), and just the same it’s been mostly strong under President George W. Bush. Still, no one would mistake the booming Reagan (S&P 500 + 121%) and Clinton (S&P 500 + 208%) economies for the one we’ve experienced during Bush’s (S&P 500 +2%) tenure. GDP measures the total market value of all goods and services produced, and with the dollar impressively weak this decade, it’s unsurprising that this might show up in a positive way given the bogus nature of GDP calculations.

About GDP it should also be said that some of the inputs used to calculate the number misread economic strength. The alleged trade “deficit” is merely a signal that lots of capital is flowing our way from around the world, and while that’s an economic positive, a large deficit in this area subtracts from GDP growth. Conversely, government spending is by definition an economic retardant for capital being removed from the private sector for immediate government consumption, but when it comes to GDP, this adds to economic growth. The silly “stimulus” packages from 2001 and this past spring that “increased” GDP should be considered in this light.

19th century political economist Alfred Marshall defined labor as “any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work.” Marshall’s definition of labor defines that which is economic growth, so recession or no recession, there seems to be a general consensus (confirmed by a very unhappy electorate) that something’s wrong such that Americans aren’t putting forth work effort in ways they once did. So rather than debate unreliable data points, it should be asked why people are working less.

On the tax front, the 2003 tax cuts reduced the penalties on work and investment. The reductions were a positive, but with the White House set to change hands in November, there’s a great deal of uncertainty about what’s ahead. On the one hand Barack Obama would like to sunset those cuts, and on the other John McCain at least publicly supports the very decreases he voted against five years ago. Those who like low tax rates have reason to be scared either way.

Removal of the above uncertainty one way or the other would be a big positive in that workers and investors would know with certainty what the future tax picture will look like. A fluid tax environment creates a fluid and economy-retarding work environment. It says here that the GOP is correct in its push to make the ’03 tax legislation permanent.

Still, the U.S. economy since World War II has performed well under all manner of tax regimes. While low penalties on work and investment offer the ideal growth environment, the economy has performed better in decades past despite higher income and capital gains rates. And when we consider the 2003 cuts, they were easily marginalized by a collapsing dollar which is itself a huge tax on income and investment. As right as the GOP presently is on taxes, the dollar’s collapse on its watch has in many ways discredited any gains made by tax-rate reductions. It is said that “politicians don’t do currencies,” and the GOP’s unwillingness to “do currencies” has and will be a path to minority status in both houses of Congress alongside a President Obama.

And while it’s hard to gauge its impact on work effort, last week’s photos of former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin being hauled off in handcuffs were a sick reminder that failure in the United States is increasingly against the law. The Cioffi/Tannin case is a federal one, and it goes hand-in-hand with the Department of Justice’s past destruction of Arthur Anderson which occurred in concert with Congress's passage of the risk-reducing Sarbanes-Oxley. Innovation by definition frequently occurs alongside failure, and with commercial mistakes increasingly the path to jail, it’s fair to ask how much the “tough” stances taken by federal officials when it comes executive mistakes have played a part in what the electorate deems a difficult economic landscape.

Returning to the recession debate, it’s hard to defend Democratic partisans who, with the November elections in mind, seem to delight in the pain wrought by economic uncertainty. When we consider a Democratic platform that consists of increased tax rates, harsh measures against oil companies and more regulation, the Party ought to be careful what it wishes for when it comes to future economic performance on its watch.

On the other hand, GOP partisans ought to be careful defending admittedly bogus GDP numbers that they would eagerly tear into were President Bush a Democrat. Indeed, heading into the 1996 elections it was said by those partial to the GOP that the 2.6 percent GDP growth President Clinton presided over was weak relative to that experienced under Ronald Reagan. While positions taken over 10 years ago were perhaps well founded, 2.6 percent would be a great number today. More realistically it should be said that the IPO market’s disappearance in tandem with a collapsing dollar and a 2 percent rise of the S&P on Bush’s watch is not an economy to defend or write home about.

The numbers used to calculate “recession” or “growth” really only matter insofar as a positive number might save us from another economy-retarding “stimulus” package that would “increase” GDP all the while harming our real economic prospects. Sadly, neither party is talking about the dollar, and with the latter the most problematic economic variable by far, it should be said that whichever party wins in November can expect a short economic honeymoon so long as the greenback is ignored.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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