If You Squint, You Can See the Recovery
There's been a running debate among economic commentators about whether we're in a genuine economic recovery (as opposed to another shallow, temporary reaction to the Fed's monetary "stimulus") and how strong the recovery is.
Obviously, we are all ready for this goddamned recession to be over so that we can get on with the personal ambitions that have been interrupted for the past five years. And there is someone else who is hoping a recovery will help out his personal ambitions: President Obama hopes he will finally be able to run for re-election on the theme that "it's morning again in America."
Of course, he hoped to make that argument once before. In 2010, the administration was clearly expecting the usual sharp rebound from a sharp recession, and they loudly touted a booming "recovery summer" that never happened. Obama's own policies squelched that recovery--and the same thing is happening now.
The very fact that there is a debate over whether and how much we're recovering indicates how weak the recovery is. In effect, Obama and his boosters have to tell us that the recovery really is here, honest, and we can see it if we squint real hard.
Morgan Housel provides some good information showing that this is a real recovery, with strong rebounds in GDP, industrial production, and personal income. At the New York Times, Floyd Norris presents the best case for the recovery by showing lots of neat little graphs indicating that this recovery tracks well alongside the previous two recoveries, beginning in 1991 and 2001. That makes it seem like this is a normal recovery just like any other recovery.
But it's not as comforting a comparison as Norris makes it look. After all, why pick those two recoveries for comparison? It's not enough to say that they were the most recent recoveries, because you still have to show that they are true apples-to-apples comparisons. In this regard, note that Norris's graphs all begin at the beginning of the recovery, not at the beginning of the recession, which leaves out the really important context.
The previous two recessions were far shorter and shallow than this one, and all we needed was a mild recovery from a mild recession. Yet the Great Recession that began in 2007 was the most severe and prolonged since the Great Depression. So to say that this recovery is comparable to the previous two is to say that it's a shallow, mild recovery from a deep, severe recession, which puts things in a much different light.
If you want to get a real perspective on this recession and the current recovery, there is a much better set of graphs at this great site, courtesy of the Minneapolis Fed, which lets you track employment and output from the start of the recession or from the start of the recovery. And you can do so for any of the post-World-War-II recessions, turning them on and off to make any comparison you like.
It's a terrific tool, and it has a very clear story to tell. If you compare the recessions for every downturn from 1948 through 1981 (I'd turn off the 1980 recession, since it includes the double-dip in 1981, which makes the graph confusing), you see a consistent sharp "V" pattern, where output and employment dip down sharply for a year or so, then bounce back up sharply immediately thereafter. Now add in the 1990 and 2001 recessions, and you'll notice a different pattern. The two recessions Norris chose as models stand out for having much shallower recoveries: long, sloping bowl-shaped rebounds, particularly when it comes to employment. In previous recessions, employment was fully recovered and expanding above pre-recession levels within about two years. In 1990 and 2001, it took about three to four years.
Now add back in the current recession. It doesn't even look like it belongs on the same graph as the others. It is much deeper and longer. At the two-year mark when every other post-war recession had been over or nearly over, this one is just bottoming out. And then it follows the same long, bowl-shaped pattern as the 2001 recovery, at which rate employment ought to be fully recovered somewhere around the six-year mark, at the beginning of 2014. Like I said, it's a mild, shallow recovery from a prolonged, severe recession.
From a political perspective, the best comparison is between the 1981 recession and the current one. Go back to the Minneapolis Fed graphs and try it out. Suffice to say that by 1984 no one had to squint to see President Reagan's recovery, and there wasn't any real debate whether it was morning again in America.
By contrast, President Obama has been depending on the economy to makes its normal, natural V-shaped recovery, while doing everything he can to undermine and suppress that recovery.
The economic crisis was caused, in large part, by excessive debt, so a big part of the solution is to increase savings and pay down debt, creating the financial reserves to support a new expansion. Instead, Obama and congressional Democrats rapidly increased government debt with the giant "stimulus" bill, which wasted the better part of a trillion dollars. (An article in the New York Times recently traced where the money went and why it didn't do any good. Though its author is too optimistic about government's ability to stimulate the economy in theory, he is accurate about its failure to do so in practice.)
If the government wasn't going to reduce its debt, how about individuals? But the Fed's zero-interest-rate policy has been punishing savers by crushing their yields. Meanwhile, Obama's new budget proposes a massive tax increase on dividends, which will squeeze savers even more, at all income levels.
Rick Newman recently reported that President Obama is "pushing for an endgame to the financial crisis," which might lead you to believe that he is seeking to settle the lawsuits against mortgage lenders and solidify the new financial regulations and create a stable, predictable financial climate. But as is usual with mainstream media reporting, the facts don't support this conclusion, because the rest of the article is about how the administration is prolonging financial uncertainty, particularly through the formation of a new flying squad of prosecutors looking to put somebody, anybody in jail to show that Obama is finally getting tough with Wall Street. Meanwhile, the Dodd-Frank financial regulations passed in the immediate aftermath of the financial crisis are so vast and vague that regulators still haven't finished deciding what the legislation actually means.
A recent analysis of employment levels pointed out that while overall employment since the beginning of the recession has been declining-to-flat, employment has been soaring in one sector, domestic oil and gas exploration, thanks to the shale boom. It then notes the irony that this is the sector the administration has been working to discourage, while it plows public "investments" into failing "renewable energy" firms.
And what of the government's other big public "investments"? Chrysler caused a stir with its Super Bowl ad proclaiming that the automaker is surging back and that it's "halftime in America." Well, halftime turns out to be a pretty good metaphor for Chrysler, because that's the point at which you still don't know whether you've won the game or not. After all, while the Chrysler ad was airing, during the Super Bowl's halftime, Tom Brady must have felt like he was in pretty good shape.
A recent follow-up on that ad finds that the Obama administration brought in European automaker Fiat to help prop up Chrysler, but with the economic crisis in Europe, it is Chrysler that will now have to prop up Fiat. Meanwhile, "Sergio Marchionne, chief executive of Fiat and Chrysler, has said any modern automaker must be able to sell at least 6 million vehicles annually to be financially viable. Fiat and Chrysler are selling just over 4 million vehicles together." It's halftime, all right, and Chrysler's team is behind.
This is a political environment in which every decision is cockeyed. A massive expansion of Social Security benefits looms over us and threatens to bankrupt the country, so naturally Congress just voted to extend the payroll tax holiday, which reduces Social Security revenues and brings the crisis closer. I would have no real problem with that, if it meant that we will be forced to reform Social Security sooner, but this is precisely what President Obama has ruled out.
The political/economic issue that defines the Obama recovery is the fact that the federal government now operates without a budget. The Senate has refused to pass one ever since Democrats gained a majority and Obama came into office, and this year, Senate Majority Leader Harry Reid has signaled that he does not even intend to propose a budget. There's an old saying inside the Beltway that if you can't budget, you can't govern. What a budgetless system of government means is that every major decision on federal spending, debt, and taxes has to be fought all over again in the political arena every few months, creating pervasive uncertainty.
A recovery can't take off unless businessmen and investors have confidence in their ability to project the future and make plans. They have to know what taxes they will be required to pay, what regulations they will have to comply with, whether or not the federal government is going to be able to pay its bills, and what a dollar is going to be worth. The current leadership, President Obama first and foremost, is doing everything it can to create uncertainty on all of these issues.
The only question is why we're recovering at all. I think there are three answers: thrift, industry, and gridlock.
The government hasn't deleveraged, but private citizens have. In his article defending the existence of the recovery, Morgan Housel cites the figures: "Since 2008, mortgage debt has declined by about $1 trillion. Credit card debt has dropped by $180 billion. Household debt payments as a percentage of income are now at the lowest level in 18 years. Even when government debt is taken into account, the economy's total debt-to-GDP ratio has been declining for four years, and faster than nearly any other developed nation on Earth."
Meanwhile, Americans have worked hard to deal with the consequences of the recession by making their businesses more efficient so they can get more done with fewer resources.
And then there is gridlock. If investors need some degree of certainty, the ongoing political standoff between Obama Democrats and Tea Party Republicans at least has the virtue of ensuring that no one will make any major changes to the status quo. President Obama can threaten to increase taxes, but Republicans are unlikely to vote for them. He can write budgets with trillion-dollar deficits as far as the eye can see, but his documents are dead on arrival on the House floor. And the big surprise to me is that Obama has been relatively timid, compared to what is theoretically possible to him, in using in his unilateral executive powers to impose things like the cap-and-trade energy dictatorship that is being considered at the EPA.
So the result is that the economy is able to grow, slowly and painfully, thanks to the ambitiousness of individual citizens and the not-so-benign neglect of the political class. But because Obama has created such hostile conditions for economic recovery, we are left with what one observer describes as "a recovery, but a cold and grey one."
Not as catchy as "morning again in America," now is it?
