Diary

Is Recession Over, or Just Beginning?

The Commerce Department announced Friday, January 29 that the economy grew at an annualized rate of 5.7% in the fourth quarter of 2009. This sounds like good news for the Obama administration, the biggest quarterly growth rate since 2003.

 

But is this really something to cheer about?

 

No. Because this growth is like a dying patient who suddenly feels better. In other words, the economy was so low that anything is an improvement over the alternative. And although it indeed is a positive sign in a sea of negatives, the question is: Will the patient continue to improve, or was this just a spike fueled by the morphine of seasonal Christmas spending, inventory spending and temporary government stimulus?

 

There still is a vestige of natural resilience in our economy that surely helped the fourth-quarter numbers. But that last gasp of capitalist buoyancy is being thwarted by punitive Obama policies against taxpayers, banks and businesses both large and small. We should be thankful that the health-care bill, along with cap-and-tax and pro-union card check legislation will no longer pass Congress. Because they would have polished off any chances for a future rebound.

 

The bad news is that the national debt load being incurred by Obama policies is going to undermine any chances for growth. On the same day that the 5.7% quarterly result was announced the US Senate – with all Republicans voting ‘no’ and all Democrats voting ‘yes’ – voted to increase the national debt ceiling by a whopping $1.9 trillion, the largest such increase in history.

 

Does not this news in itself negate the hoopla over the big growth spurt? 

 

Indeed it does.

 

Here are the details about the fourth quarter 5.7% rate: It is the second positive quarter in a row after four negative quarters (third quarter 2008 through second quarter 2009). Third-quarter 2009 growth was 1.5%. So this all appears to be a good sign – two quarters of growth, which usually marks the end of recession. But 60% of the 5.7% growth was attributed to companies’ refilling depleted inventories, a trend that will dissipate unless the overall economy picks up and makes it a permanent trend as part of a national economic expansion.

 

Business spending on equipment and software jumped 13.3% in the fourth quarter. Christmas spending gave the economy a jolt. Exports also rose 18.1%.

 

Again, however, these figures are compared to very depressed figures in the past year.

 

So can Obama point to the 5.7% figure and claim that his policies are finally working?

 

No. And the reason is simple. There are many factors acting on the economy today and only one factor at a time seems to be pointing upward. Real growth means that all the indicators are rising. But at the same time that the fourth-quarter growth figure was announced, the stock market was ending January on a strongly negative note after big advances in the second half of 2009. And the trend generally has been that January stock market activity sets the tone for the year to come.

 

Look at our national debt figures and you can see trends that point to a stalled economy for years to come.

 

From 1980 to 2010, we have seen fluctuations in spending and taxes, according to a graph in The Wall Street Journal.  In 1980, government spending was 22% of GDP (Gross Domestic Product, or the total national wealth of goods and services) and receipts were 19%. The difference (-3 points) is the deficit.

 

The two lines crossed, where spending and receipts were the same (budget balanced) around 1997. In 2000 there were substantial budget surpluses of +3 points because Clinton deeply slashed military spending while the economy was still artificially strong, before the dot-com and tech sector collapses, and before 9/11.

 

By 2005, receipts were 16% of GDP while outlays were 19%, or -3 points again. For 2010, however, it is estimated that spending will be 25% of GDP(!) while receipts to the government are only 15%(!). This is a whopping -10 points difference attributable to Obama’s incessant spending while the economy is hobbled.

 

Meanwhile the gap between receipts and spending is expected to be 15% and 24% or -9 points for 2011. Projections for 2012 and beyond are in the area of  -7 points. These deficits are unsustainable.

 

Within a few years, our national debt is going to be 100% of our annual GDP ($14 trillion+). This is a distressing figure because America was the one major industrialized nation whose debt always has been significantly less than its GDP. Japan, on the other hand, a high-tax, socialist nation, has a debt that is reported to be 170% of its GDP. That is why Japan is in a long-term recession.

 

When we look at America’s unemployment rate today, we think it is shocking. Yet 10% is a standard unemployment rate for much of the industrialized world, which all rational economists will tell you to expect in high-tax, economies. Europe has year-after-year “official” rates of 7% to 12% or more depending on the country, with actual rates much higher. Europe also consequently has very low growth figures, which is why the global recession is not being remedied by growth abroad – because  there is little or none.

 

After decades of stasis, however, Europe is adjusting its economic policies rightward toward lower taxes just as the US is going left. In many European nations, corporate tax rates, individual tax rates and capital gains rates today are actually lower than the US. These American figures are a result of decades of incremental liberal influence on our economy even when Republicans were in power.

 

Japan has been in a severe recession since 1990 when its stock and real estate markets collapsed. The past 20 years in Japan are called The Lost Decades. In his state of the union speech recently, Obama referred to the last 10 years in the United States as The Lost Decade. And he was partially right. It was a bubble that burst. But before bursting, things were really hot with economists calling the American economy around 2006 the best they ever had seen it.

 

Today, however, there are many structural problems that can only be solved by policies that Obama is unwilling to pursue like drastic government spending cuts, and tax cuts on individuals and businesses. And so in the long run, until our policies change, the fourth-quarter 2009 growth rate of 5.7% may be seen as just a positive blip in a recession that is not ending, but that may just be beginning and that may last for years and years to come.

 

Please visit my website at www.nikitas3.com for more. You can print out for free my book, Right Is Right, which explains why only conservatism can maintain our freedom and prosperity.