WASHINGTON, February 15, 2014 — Economic definitions seem to be changing, while economic theories are becoming less believable. In the past, when the economy experienced a reduction in output for two successive quarters of a year, we were in an economic recession. If the economy declined for two years or more, that was a depression.
Economics professors claimed that depressions are virtually impossible today, since we know how to use fiscal and monetary policy to stop a recession from becoming a depression.
Today those definitions and theories don’t seem to be true.
The National Bureau of Economic Research, an independent group of economists, determines when a recession begins and when it ends. By NBER’s definition, the great recession started in December 2007 and ended in June 2009, even though the first and second quarters of 2008 saw positive, but weak, growth. In each of the four quarters from July 2008 to June 2009, output declined.
By itself, that would not constitute a depression, but the long time to return to pre-recession output and the long, persistent unemployment that accompanied it mark this recession as different from earlier recessions. The recovery has been anemic — we have averaged about 2 percent growth during the recovery, while we averaged over 5 percent growth during the recovery from the severe 1981 recession — and we should refer to this period as the “Obama Depression.”
We should put Obama’s name on this depression because his policies have prolonged it. They have burdened the business sector with uncertainty, regulations, higher future health care costs and higher taxes, burdened the consumer sector with higher taxes, and burdened the investment community with over-regulation and even higher taxes on both income and capital gains. All of these have led to the anemic recovery.
A clear sign of a depression is the unemployment rate. While it is currently reported as 6.6 percent, the true unemployment rate is much higher. When we add in the discouraged workers who want jobs but are no longer seeking them because they feel the search is futile, the real rate jumps to almost 15 percent. These people aren’t actively seeking work, and are therefore not counted as unemployed, because they can collect more than two years of unemployment benefits, can easily get food stamps, can be eligible for welfare now that the requirements have been relaxed, and generally see a lack of opportunity.
A depression was believed to be virtually impossible because government can implement expansive fiscal policy — increasing government spending or cutting taxes — and monetary policy — manipulating the money supply and interest rates. The reality today is that we have had the most expansive fiscal policy in history by spending trillions more than we received in revenue, and the most expansive monetary policy in history by almost tripling the money supply and pushing interest rates almost to zero. Yet the anemic recovery from the Obama Depression continues. Why?
Both fiscal and monetary policy are demand-side solutions; both are intended to increase aggregate demand in the economy. By increasing demand, it is reasoned, government encourages businesses to hire more people to produce more output to meet the demand and, after a multiplying effect, this should lead to growth. For the last five years, though, it hasn’t worked.
A demand side solution will not necessarily stimulate a stagnant economy. Maybe we should look instead at the supply side. In 1981 we faced a somewhat similar, but worse, situation. We were experiencing stagflation which is a condition of a no-growth (stagnant) economy with rapidly rising prices (inflation). Demand side solutions couldn’t be used because if we took actions to increase demand, the stagnation might end, but prices would be bid upward to pour fuel on an already raging bonfire of inflation. If we took action to reduce inflation by cutting back the money supply, businesses would have a hard time getting credit for growth, and an already stagnant economy might tip back into full-blown recession.
The solution was to take action — not on the demand side, but on the supply side. By giving incentives to producers, we would increase output which would grow the economy. Their expanded output would put downward pressure on prices, thereby reducing inflation.
A supply side solution is what we need today. Unfortunately policy makers are doing just the opposite. Instead of policies geared to increase supply and grow the economy, the policies of the past few years have tended to decrease supply.
To implement a supply side solution, we need policies that will encourage the business sector to expand. These policies include lower tax rates on both income and capital gains, especially for the highest income earners who supply the investment capital to the economy. Also, business needs to see fewer obstacles to growth. This is accomplished by reducing barriers to entry into markets and reducing burdensome and counter-productive government regulations.
Unfortunately, in the past five years we have increased income tax rates for those who provide investment capital, raised the tax rates on capital gains which directly reduces investment capital, passed numerous laws like Dodd Frank that restrict businesses’ ability to grow, and added burdensome regulations.
The correct supply side actions needed today are to reduce tax rates, especially for the wealthy, reduce capital gain tax rates, remove the stifling regulations and inject a sense of freedom and opportunity. This would increase output, grow the economy, reduce unemployment, eventually increase tax revenue, put downward pressure on inflation and finally end the “Obama Depression.”