I have often scolded the Obama campaign for justifying tax increases by comparing the levels they want to set to levels in the past. In some sense, I am about to do something similar, and so before I do, I want to make sure everyone understands how these two exercises are different. When setting economic policy, the only thing someone should look at is the immediate past. In other words, what taxes were ten and twenty years ago is largely irrelevant. What taxes are now is what is relevant. When trying to decipher how an economy is doing, on the other hand, the only comparison you can make is a historic one. That's why I believe what I am about to do and what the Obama campaign likes to do vis a vis tax policy is apples and oranges.
Now then, you can't turn around anywhere and not find to words economic and crisis together. (16,800,000 links according to Google) In fact, if you witnessed the Democratic convention, you would have thought that we were about to head back into the 19th century the way our economy was going. The MSM is the partner of the Democratic party on painting this economy on the brink of total annihilation. Now, I am not here to pretend that things are jolly good in the economy. They aren't, and there is no doubt the economy has weakened. It is even nearing in on a recession. On the other hand, recessions are not new, and the current state of the economy, is not so awful, that it requires panic or some sort revolutionary shift in our economic policy a la Barack Obama.
First, the perception of the economic crisis is a result of the very real mortgage crisis. There is no doubt that anyone related to mortgages is right now in the middle of a very real crisis. Real estate, however, is just one industry, and the reality of the real estate crisis, has created a false perception of an economic crisis.
By almost any measure, our economy is not necessarily altogether all that bad. For instance, there has been all sorts of dire analyses in response to the latest jobs report numbers. Currently, our unemployment rate is at 6.1%. Now, you have to go all the way back to 2003 to find a number that high. That's right, it's been a whole five years since last we saw such high unemployment numbers. Most of the same people that were predicting doom then are predicting doom once again. What most of these folks conveniently ignorned was the five years of economic boom that we had in between their dire forecasts. That's why even after eight straight months of negative jobs growth, we have a relatively small 6.1% unemployment rate. I say relatively small because in June of 1992 it was 7.8%. In 1980, it reached a high of 7.5%. For a real problem, the unemployment rate in 1933 was nearly 25%.
Another measure of economic growth is GDP growth. Here the alarmists are on even weaker footing. GDP has been growing about 3% per annum since the end of 2002. In fact, GDP began growing before jobs began to return. It hasn't stopped growing. Even this year, when we were supposed to be in the middle of crisis, the GDP has grown at 1.9% per annum year to date.
Inflation continues to be relatively mild though aggressive rate cuts put downward pressure on the dollar which exploded oil and commodity prices and in effect have put upward pressure on inflation. Interest rates continue to be relatively low.
It's only in the equities markets where you will find stunted growth over any protracted period. Of course, that's all the more reason not to raise the Capital Gains Tax as Barack Obama suggests.
Even if you examined real estate and banking itself, you would find that things aren't as gloomy as the critics make it out to be.
The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today's delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day -- the highest since the Great Depression, one supposes -- in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don't recall hearing any Democratic politicians complaining back then.
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and as for bank closures...
Turmoil" in the debt markets? Sure, but we've seen plenty worse. According to the FDIC, there have been a total of 13 bank failures in 2007 and so far into 2008. There were 15 in 1999-2000, the climax of the Obama-celebrated era of Clintonian prosperity. And in recession-free 1988-89, there were 1,004 failures -- almost an order of magnitude more than today. Since the Great Depression, the average number of bank failures each year has been 94.
Despite highly publicized losses in subprime mortgage lending, bank equity capital -- the best measure of core financial strength -- is now $1.35 trillion, more than the $1.28 trillion level of mid-2007, before the "turmoil" even began.
So, there you have it. That is the view of the economy from as many angles as you can find, and on the whole, you see an economy that is in fact, as John McCain states, fundamentally sound. I know I can just hear the complaints from Democrats now.
tell that to the factory worker that just lost his job.
Well, guess what there is always a factory worker that lost his job. There are always folks struggling to make a mortgage payment, find a job, or make ends meet in all sorts of ways. Of course, you can't introduce a revolutionary policy of massive government expansion unless you convince the electorate of a few things: 1) the economy is about crumble 2)laisse faire policy caused it and 3) only a new massive government run economy can solve it. That's what's going on here. In order to suggest massive new government expanision, first you must convince the folks the economy is doomed. Never mind the facts when propaganda is just so easy.
Here is the dirty little secret that the doom and gloom crowd won't tell you. The government can't actually create the jobs they promise have gone away and will return. The government can only stay as far away from the economy as possible and let the market create the jobs. This foolhearty notion that the government is all powerful and can resolve all your financial ills is something that can only work on the electorate if they feel the economy is in bad enough shape. The only time in our history when we had such sweeping government interference was in 1933, the Depression. There is now plenty of fair assessment that FDR's policies did little or nothing to straigthen out the economy.
The same is true now.
Politicians always promise that their programs will create jobs. It's used to justify building palatial sports stadiums for wealthy team owners. Alaska Rep. Don Young claimed the infamous "bridge to nowhere" would create job(http://tinyurl.com/6jq623). The fallacy is the same in every case: Even if the program creates jobs building bridges or windmills, it necessarily prevents other jobs from being created. This is because government spending merely diverts money from private projects to government projects.
Governments create no wealth. They only move it around while taking a cut for their trouble. So any jobs created over here come at the expense of jobs that would have been created over there. Overlooking this fact is known as the broken-window fallacy (http://tinyurl.com/ydasa2). The French economist Frederic Bastiat pointed out that a broken shop window will create work for a glassmaker, but that work comes only at the expense of the cook or tailor the shopkeeper would have patronized if he didn't have to replace the window.
Creating jobs is not difficult for government officials. Pharaohs created thousands of jobs by building pyramids. Our government could create jobs by paying people to dig holes and then fill them up. Would actual wealth be created? Of course not. It would be destroyed. It's like arguing the hurricanes create jobs. After all, the destruction is followed by rebuilding. But does anyone seriously believe that replacing destroyed buildings creates wealth?
That's the real dirty little secret here. All those politicians that promise to fix your economic malaise are selling you a bill of goods. First, the only person that can fix their economic malaise is the person themselves. Second, the only thing that can fix any macro economic malaise is the market itself. My dad told me last night that the economy won't recover until the real estate market recovers. I agree this economy will continue to exhibit weakness until the housing market recovers. Of course, the reality, the one that politicians won't tell you, is that the only thing that will bring the real estate market back is the real estate market itself. There is absolutely nothing that any politician can do to force people to buy homes. Nothing. Of course, the sorts of policies that the alarmists propose could only be suggested if the electorate really believes we are in a crisis.
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