His Greatest Failure: The Absence of Economic Recovery Under Obama’s Keynesian Rule is What Has Most Transformed America
President Obama likes to pose as a martyred man, because when he entered office, the economy was in a recession. But the recession soon ended, following the pattern of the American economy for the entire previous two-thirds of a century, and more.
During that time before Obama, America suffered 11 recessions since the Great Depression. The average length of those previous recessions was 10 months, with the longest being 16 months, as I have reported in this column before. When Obama entered office, the recession was in its 13th month. So based on the previous, long-term pattern of the American economy, the recession would soon be over.
And it soon was. According to the National Bureau of Economic Research (NBER), a collection of top economists recognized as the authoritative body as to when recessions start and when they end, the recession ended in June 2009. So the rest of Obama’s entire first term was the recovery from the recession.
That should have been very promising for Obama, because the long-term historical pattern of the American economy was also the deeper the recession, the stronger the recovery. Economist John Lott, in his new book, At the Brink: Will Obama Push Us Over the Edge?, quotes Milton Friedman on this point as saying, “A large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.”
That was true even during the Great Depression. From 1935 to 1937, the economy actually boomed, with real GDP growth peaking at an astounding 13.1% in 1936. Similarly, in 1946 to 1948, the economy also suffered a severe recession, as America powered down from the World War II economy. But the economy began a postwar boom in 1949, with real GDP growth reaching 8.7% in 1950.
The economy boomed over the 1950s and 1960s in further recovery from the Great Depression 1930s. And it boomed with the historic, 25-year Reagan boom from 1982 to 2007, in recovery from the disastrous 1970s, which suffered historic, double digit inflation, and four worsening recessions from 1969 to 1982.
But nothing like that happened during the Obama recovery from the Great Recession. Real GDP growth peaked at 2.4% in 2010, and has never again reached even that pitiful level for a recovery from a deep recession. All Obama had to do to be a hero was stay out of the way of the typical American recovery. But Obama couldn’t do it. He was too busy fundamentally transforming America, a goal that implies there was something fundamentally wrong with America before he came along.
But is Obama’s fundamental transformation making America better, or trashing it? Obama keeps trying to tell us what a great success he has been by comparing the recovery to the recession. But recoveries are always better than recessions, by definition, so that is no achievement.
The right measure and comparison for Obama’s record is to compare the recovery not to the recession, but to 11 previous recoveries since the Great Depression. In those recoveries, the economy recovered all jobs lost during the previous recession within 25 months after the prior jobs peak (or recession start). So the job effects of prior post-recessions have lasted an average of about two years. But under President Obama, at the end of his first term in January 2013, 61 months after the prior jobs peak, more than 5 years, we still had not recovered all of the recession’s job losses. In January 2013, there were an estimated 134.8 million American workers employed, still down more than 3.2 million jobs from the prior peak of 138 million in January, 2008.
That included the longest period since the Great Depression with unemployment above 8%, 43 months, from February 2009, when Obama’s so-called stimulus costing nearly $1 trillion was passed, until August 2012. It also included the longest period since the Great Depression with unemployment at 9.0% or above, 30 months, from April 2009, until September 2011. In fact, during the entire 65 years from January 1948 to January 2013, there were no previous months, before Obama’s reign of error, with unemployment over 8%, except for 26 months during the bitter 1981-1982 recession, which slew the historic inflation of the 1970s. That is how inconsistent with the prior history of the American economy President Obama’s extended unemployment has been. That is some fundamental transformation of America.
By this point in the Reagan recovery, 61 months after the recession started, jobs had grown 8.7% higher than where they were when the steep 1981-1982 recession started, representing an increase of about 10 million new jobs. By contrast, in January 2013, jobs in the Obama recovery from the 2008-2009 recession were still 2.3% below where they were when the recession started, at least 3 million less, or a shortfall of about 8 million jobs if you count population growth since the recession started.
Moreover, in the 11 post-Depression recessions before President Obama, the economy recovered the GDP lost during the recession within an average of 4.5 quarters after the recession’s start. It took Obama’s recovery 16 quarters, or 4 years, to reach that point. Today, 5 years, or 20 quarters, after the recession started, the economy (real GDP) has grown just 2.4% above where it was when the recession started. By sharp contrast, at this point in the Reagan recovery, the economy had boomed by 18.1%, almost one-fifth.
Worse Even Than Bush or Carter
Bush’s second term suffered the Great Recession for more than a full year, or more than 25% of Bush’s entire second term, while the recession covered only the first 5 months of Obama’s first term. Prior to Obama, Bush’s second term suffered the worst real GDP growth of any full Presidential term since the Depression, with an average of just 1.9%. But average annual real GDP growth during Obama’s entire first term was less than half as much at a pitiful 0.8%.
Indeed, not only was economic growth during Bush’s awful second term more than twice as high as during Obama’s entire first term. Even Jimmy Carter produced 4 times as much economic growth during his one term as Obama did during his entire first term. In fact, real GDP growth under Obama has been the worst of any President in the last 60 years, as observed by Jeffrey H. Anderson, a senior fellow at the Pacific Research Institute, in Investor’s Business Daily on January 13.
But it’s even worse than that. As Anderson further observes, Obama’s real GDP growth has actually been less than half as much as the worst of any President in the last 60 years. In other words, even if you doubled actual GDP growth under President Obama, it would still be the worst record of any President in the last 60 years!
By the fourth quarter of 2012, Obama’s economy basically stopped growing altogether. Even if the economy finally breaks out into some real growth this year, that is only because of the long overdue recovery that is still straining to break out inside this economy, as indicated by the data above for 1936, in the depths of the Depression, and the postwar boom that started in 1950. That and the startling Reagan recovery from the 1970s are the standard for Obamanomics. Don’t be fooled by some way overdue short-term growth spurt this year that just reflects the basic cycles of the economy. Unless the fundamentals of Obamanomics are changed, the result will be long-term stagnation compared to the historic, world-leading, booming economic growth of the American Dream, and probably another recession during Obama’s second term.
Where Obama Went Wrong
The real reason Obama’s recovery has been the worst since the Great Depression is that he went back to the Keynesian economics of the Great Depression, which didn’t work then and won’t work now, and has pursued exactly the opposite of every pro-growth policy illuminated by Reaganomics. Obama’s Keynesian economic policies have focused on increasing demand, particularly through increased government spending and deficits, and through easy monetary policy, as the key to restoring economic growth, rather than focusing on incentives to increase production, as in the new, modern, supply-side economics that Reagan adopted in 1981. Keynesian policies failed so thoroughly in the 1970s that it is puzzling as to why Obama returned to them, as if he were ignorant not only of what happened then, but of everything that happened after then, from 1980 on. That is why I have called Obama’s economic policies Rip Van Winkle economics, because Obama seems to have slept through the 25-year economic boom from 1982 to 2007, and to be totally unaware of everything that happened then, in his own country.
Keynesian economics first arose in the 1930s in response to the Depression. The doctrine holds that economic growth is stimulated by increased government spending, deficits and debt. That is supposed to increase aggregate demand, which is supposed to lead to increased production to satisfy that demand, restoring economic growth.
But if the government spends more, where does the money for that increased spending come from? Either from increased borrowing, or increased taxes, which both take an equal amount of resources and spending out of the private economy as they finance in increased government spending. So not only can there not be a net increase in aggregate demand from these policies. The result is a net drag on growth, as the private economy spends money more productively and efficiently than the government. That is why it never worked in the 1930s, as the recession of 1929 extended into the decade long Great Depression, and it hasn’t worked anywhere else since. This is also why Obama’s so-called “stimulus” from February 2009 failed thoroughly, just wasting nearly a trillion dollars, and adding that much more to the national debt.
But most fundamentally, economic growth is not driven by demand, which is insatiable, but by increased production or output (supply), which is driven by incentives for productive activity. In other words, just as an individual cannot spend himself rich, neither can a nation. Prosperity is determined by production, just as an individual increases his or her income by becoming more productive.
Demand can never be inadequate in a market economy. If the demand for any product or service is not strong enough, the price of the good or service will fall, until demand equals supply. The people can never spend more than they produce, increasing aggregate demand. And they will never spend less, leaving demand inadequate, for they will either consume or save every dime that they earn or produce. The consumption goes into consumer spending, and the savings goes into capital spending (which is actually what makes us richer and more prosperous over the long run).
Keynesian economics has survived so long in Western thinking not because it works, or even makes any sense, but because it justifies what liberal politicians already want to do – spend with reckless abandon, run bigger and bigger deficits so they don’t have to explicitly pay for the spending with higher taxes today, and run up the national debt, which will be someone else’s problem later.
Obama was sold to us as a progressive, forward-looking thinker. But he is actually taking America back to the thoroughly failed economics policies of the 1970s, and even the 1930s, and so ultimately to the same results. Obama should have known better, given the uniformly bad experience with Keynesian economics worldwide, and its fundamental, transparent illogic. Indeed, Obama had a responsibility to the American people to know better. This latest experience with Keynesian Obamanomics in producing the worst recovery since the Great Depression should be taken as the final failure of the transparently foolish Keynesian doctrine, which now needs to be put to bed, in American colleges and universities, and throughout the councils of government.
[First published at The American Spectator]