Great op ed piece by John Taylor

The End of the Growth Consensus

America added 44 million jobs in the 1980s and '90s, when both parties showed they had learned from past mistakes. The lessons have been forgotten.

By John Taylor

This month marks the two-year anniversary of the official start of the recovery from the 2007-09 recession. But it's a recovery in name only: Real gross domestic product growth has averaged only 2.8% per year compared with 7.1% after the most recent deep recession in 1981-82. The growth slowdown this year—to about 1.5% in the second quarter—is not only disappointing, it's a reminder that the recovery has been stalled from the start. As shown in the nearby chart, the percentage of the working-age population that is actually working has declined since the start of the recovery in sharp contrast to 1983-84. With unemployment still over 9%, there is an urgent need to change course.

Some blame the weak recovery on special factors such as high personal saving rates as households repair their balance sheets. But people are consuming a larger fraction of their income now than they were in the 1983-84 recovery: The personal savings rate is 5.6% now compared with 9.4% then. Others blame certain sectors such as weak housing. But the weak housing sector is much less of a negative factor today than declining net exports were in the 1983-84 recovery, and the problem isn't confined to any particular sector. The broad categories of investment and consumption are both contributing less to growth. Real GDP growth is 60%-70% less than in the early-'80s recovery, as is growth in consumption and investment.

In my view, the best way to understand the problems confronting the American economy is to go back to the basic principles upon which the country was founded—economic freedom and political freedom. With lessons learned from the century's tougher decades, including the Great Depression of the '30s and the Great Inflation of the '70s, America entered a period of unprecedented economic stability and growth in the '80s and '90s. Not only was job growth amazingly strong—44 million jobs were created during those expansions—it was a more stable and sustained growth period than ever before in American history.

Economic policy in the '80s and '90s was decidedly noninterventionist, especially in comparison with the damaging wage and price controls of the '70s. Attention was paid to the principles of economic and political liberty: limited government, incentives, private markets, and a predictable rule of law. Monetary policy focused on price stability. Tax reform led to lower marginal tax rates. Regulatory reform encouraged competition and innovation. Welfare reform devolved decisions to the states. And with strong economic growth and spending restraint, the federal budget moved into balance.

As the 21st century began, many hoped that applying these same limited-government and market-based policy principles to Social Security, education and health care would create greater opportunities and better lives for all Americans.

But policy veered in a different direction. Public officials from both parties apparently found the limited government approach to be a disadvantage, some simply because they wanted to do more—whether to tame the business cycle, increase homeownership, or provide the elderly with better drug coverage.

And so policy swung back in a more interventionist direction, with the federal government assuming greater powers. The result was not the intended improvement, but rather an epidemic of unintended consequences—a financial crisis, a great recession, ballooning debt and today's nonexistent recovery.

The change in policy direction did not occur overnight. We saw increased federal intervention in the housing market beginning in the late 1990s. We saw the removal of Federal Reserve reporting and accountability requirements for money growth from the Federal Reserve Act in 2000. We saw the return of discretionary countercyclical fiscal policy in the form of tax rebate checks in 2001. We saw monetary policy moving in a more activist direction with extraordinarily low interest rates for the economic conditions in 2003-05. And, of course, interventionism reached a new peak with the massive government bailouts of Detroit and Wall Street in 2008.

Since 2009, Washington has doubled down on its interventionist policy. The Fed has engaged in a super-loose monetary policy—including two rounds of quantitative easing, QE1 in 2009 and QE2 in 2010-11. These large-scale purchases of mortgages and Treasury debt did not bring recovery but instead created uncertainty about their impact on inflation, the dollar and the economy. On the fiscal side, we've also seen extraordinary interventions—from the large poorly-designed 2009 stimulus package to a slew of targeted programs including "cash for clunkers" and tax credits for first-time home buyers. Again, these interventions did not lead to recovery but instead created uncertainty about the impact of high deficits and an exploding national debt.

Big government has proved to be a clumsy manager, and it did not stop with monetary and fiscal policy. Since President Obama took office, we've added on complex regulatory interventions in health care (the Patient Protection and Affordable Care Act) and finance (the Dodd-Frank Wall Street Reform and Consumer Protection Act). The unintended consequences of these laws are already raising health-care costs and deterring new investment and risk-taking.

If these government interventions are the economic problem, then the solution is to unwind them. Some lament that with the high debt and bloated Fed balance sheet, we have run out of monetary and fiscal ammunition, but this may be a blessing in disguise. The way forward is not more spending, greater debt and continued zero-interest rates, but spending control and a return to free-market principles.

Unfortunately, as the recent debate over the debt limit indicates, narrow political partisanship can get in the way of a solution. The historical evidence on what works and what doesn't is not partisan. The harmful interventionist policies of the 1970s were supported by Democrats and Republicans alike. So were the less interventionist polices in the 1980s and '90s. So was the recent interventionist revival, and so can be the restoration of less interventionist policy going forward.

http://www.zerohedge.com/article/jo...the+survival+rate+for+everyone+drops+to+zero)

 

"But people are consuming a larger fraction of their income now than they were in the 1983-84 recovery:"

I suspect his error is right there. How do I know there is an error? Because government intervention is not causing consumers to buy less. (From where I sit it's not even causing business to spend less.) The problem is demand. Trust me, when 70% of our economy has the wherewithal to start spending again, the entire economic climate of this country is going to feel different, like rain clouds clearing. It happens every time.

 

Ricter, it's a never ending circle. To get the consumer to spend more, you need a stronger economy (jobs). But these policies of this administration are not going to create jobs. Therefore the consumer is not going to spend and round and round we go. This is why the government has taken over the role of spending! It's not that hard to understand Ricter.

 

Ricter and Mav both of you are right, it's not an either or situation. And the republicans are just as much a problem as the democrats and sometimes more so.

 

The government is not doing anything to incentivize (yes, I hate that word, too) job creation. Neither is it doing anything to disincentivize job creation.

It's pretty obvious that our basic needs are essentially being met, in spite of high unemployment/underemployment, because these things are inexpensive. Obvious because years into this mess now, no one is actually starving or freezing. If we backed off on wars, and asked the populace to pay a bit more in taxes (bringing the rate into line with our peers), we'd be able to continue to pay for life's basics without growing the deficit, and without increasing employment. Yes, all kinds of other things would attend that (consider the old saw, the Devil finds work for idle hands--still true), but it does mean that there is nothing in the structure of the US, or the character of its people, that will prevent if from at least surviving. And with our skills and experience, I'm convinced we can still do much better than that, the competition notwithstanding.

Edit: my bad, that's poorly organized, and I forgot to say, "you're right, I agree with what you said".

 

I'm going to make this hypothesis, that the larger fraction of income spent he mentions is more a function of smaller income than it is increased spending. There's a bit of an "inelastic plank" under spending, it can't really fall to zero, but income... of course that can fall to zero.

 

ricter is also forgetting about how inefficient the govt is.
and the idea that it crowds out good business.

after a bubble there should be a cleaning out.
naturally, demand must die off a bit or a lot.
the excess is chopped off.
useful businesses survive
investment dollars go to useful and new promising business
and then demand return.

If you try to create demand before the crappy zombie banks and crappy business get destroyed... you have distorted the structure of the economy.


for instance by intervening in the housing market... the govt has not let prices fall to where they are affordable to the buyer pool.

So the only current lending is govt backed lending at distorted rates.

That is a distorted market.

if the govt backed out... prices would fall, interest rates would go up and private money would start to step in.

creating profits for new entities. not zombie banks lending govt money.

 

For the record, I disagree with Taylor. IMHO, he's barking up the wrong tree.

 

Thank God you went on the record Martin. I was just getting ready to call your spokesperson to see if you were going to schedule a press conference or not.