Some Perspective on GDP Growth and the W Shaped Recovery

Here is a chart of GDP growth from 1929-1940.

Now, if you just looked at the years 1933-1940 you might not even know that we were in a depression. In fact, from the period of 1933-1940 unemployment never reached single digits. In fact, by 1938 unemployment was still at 19%. GDP growth was solid all the way from 1933-1937. Of course, in order to recover from the economic contraction of 1929-1932, it was going to take more than merely "solid" growth. That's why despite what looked like solid GDP growth all throughout the Presidency of FDR we continued in a depression.

Under Reagan's term, Reagan came in with an economic contraction that wasn't nearly as dramatic but still intense. In fact, the second quarter of 1980 saw the economy contract by 10.2%. It dipped another 5.7% and 5.6% in the last quarter of 1981 and the first quarter of 1982. So, it wasn't going to take a solid economic growth to get the economy out of that recession. In the second quarter of 1983 that's exactly what happened. The economy grew by 10.2% and every quarter after that for the rest of the year the economy grew at 6% and more.

The recession of 2001 was even more mild. The economy never even contracted. Instead, it barely grew in 2001 (.02%) and grew somewhat slowly in 2002 (1.9%). By 2003, the economy was growing at 3.7% and we entered a four year period of not economic properity.

We'll have no such luxuries this time. Here are the last six quarterly GDP growth numbers -1%, -6.4%, -5.4%, -2.7%, +1.5%, and -.7%. Now if 2.5% GDP growth is enough to keep an economy growing at a decent or C average pace, and we've lost an average of 2.6% over the last six quarters, then the economy would need to grow by just over 5% over the next six quarters just to get us back to normal.

Now, Fed Chairman Ben Bernanke believes that the economy will start to grow the next quarter of the final quarter of 2009. That's when the real work will begin for the economy. The economy will need some remarkable growth in the next six quarters in order to usher in a recovery.

That's when all the new debts the government has taken on will become an albatross. If the economy were to show that kind of recovery, then that would create higher interest rates. That's when all the deficits that we've built up not only over the last six months but the last eight years and more will kick in. Either remarkable growth will lead to massive inflation or it will lead to higher interest rates that will stunt the recovery and a W shaped recovery. So, we still have plenty of potential pitfalls in front of us and there are no good options.

L, U, V, and W

I have made no secret that I remain very bearish on the future of the economy. Yet, even I believe that soon enough we will see a recovery. In fact, if you are extremely bullish, you believe that the recovery is just now starting. If you are bit less bullish, you think in the next three months it will begin. If you are very bearish, like me, you don't see it until well into next year. Some are even more bearish than that. Still, in the next two years, at most, the economy should bottom out and begin its recovery.

Much more importantly is the shape of the recovery. Recoveries generally are shaped in one of three ways: an L, a U, and a W. It is the shape of this recovery that will be significantly more important than the timing of the recovery itself. That's because the shape of the recovery will guide the relative strength of the economy for the next decade or more.

An L shaped recovery is the worst kind of a recovery. An L shaped recovery happens when the economy bottoms out and then doesn't begin to grow for years if not decades. The best example of an L shaped recovery is what happened to Japan in the 1990's.

A U shaped recovery is the best kind of a recovery. In a U shaped recover the economy slows contracts and then just as slowly comes back out of the recession. Obviously, in this economy, the economy didn't contract slowly. The best example of this was the 1970's.

A V shaped recovery happens when the economy tanks quickly. Then, it recovers just as quickly. This happened both under Clinton in 1993 and Bush in 2001-2002.

The W shaped recession happens when the economy creates false recoveries on the road to recovery. In such a case, the economy shows signs of recovery only to fall back into a recession. In such case, the recovery last years if not decades. This is in fact the way the recovery occurred in the depression. As you can see, the economy bottomed out in 1933. Then it rose, tapered off, dipped, before finally coming out of it because of the war.

So, which sort of a recovery will we see this time? That remains to be seen but I believe the nature of the recession is a far better judge of the economic policies of a president, and the Fed, then just how slowly or quickly an economy happens to come out of the recession.

I believe that we will see this W shaped recession. It's why I am still bearish. Whatever short term signs we see of a recovery, they are, in my opinion, overwhelmed by the long term problems caused by the action in response to the recovery. In other words, I believe the medicine will wind up worse than the ailment.

Between the Fed's quantitative easing (creating money out of thin air and buying bonds with it), the massive stimulus, the bank bailouts, all of these things have run up our debt to massive levels. What does this cause? First, it causes higher interest rates, high inflation, and a weak dollar. Already, we are seeing signs of the negative effects of this. Oil has steadily been rising over the last two months. That's partially to do with the dollar, as oil is priced in dollars.

What will $3 a gallon gas prices do to our recovery? I have spoke often about the rising interest rate in the Ten Year U.S. Treasury. That's back to just under 3.7%. This has recently caused a massive short term run up in mortgage rates. What will 6% or even 7% mortgage rates do to our recovery?

Finally, there was the bank bailout. Both Obama and Bush before him often cited the bailout as keeping us from the brink of a total financial meltdown. That's possible but it also created sort of zombie banks that are really never in a position to do normal business. So, maybe these banks were walked back from the edge, but they aren't going to be in a position to significant business for a long time. Is that better than letting them fail? That will be debated.

All of this spending and borrowing will eventually create inflation. That inflation will happen when the economy begins to recover, if not sooner. That will force the Fed to either allow inflation or control it by selling back the very bonds they are buying now. Buying back bonds will cause interest rates to go back up. That will of course stunt the recovery and cause the W shaped curve that I predict.

Beyond the technical economics of all of this is the very real pain that a W shaped recovery would cause. We would see an economy sputter and start and sputter again. Businesses will invest only to see the economy weaken. People will start to go back to work only to have unemployment weaken again. There will be hills and valleys which on a graph looks interesting. In real life, it will be years of pain, and it's what I predict for the economy going forward.

Why Obama Won't Get the FDR Pass

Bernie Goldberg has a theory about President Obama and the way he will be treated by not only the media but by the public at large. Here is how he explained it.

No, he is, like, FDR — did you know that FDR was elected to a third term even though unemployment never went below 10 percent during his first two terms and for almost two years never went below 20 percent? Why do you think that is? Because, he mesmerized the nation. And Barack Obama is mesmerizing the nation. And he's got a compliant press to boot.

Wherever Goldberg is on television you will hear this thesis. The thesis goes like this. FDR's economic policies never really worked. The unemployment never fell below ten percent and for more than 20 months it was above 20%, and yet he got elected to a third term despite eight years of economic failure.

The reason that this happened was that, first, FDR made Americans feel good about themselves. Second, FDR had his predecessor to blame for any ills. Third, he had a compliant press. I don't have to point out the similarities between the two.

This is a sound theory on one level, however it is a theory that overlooks several differences between the two. For this reason, President Obama will NOT get a pass if the economy continues to fail the way it did under FDR.

The main difference is that FDR inherited an economy that already had near 25% unemployment. President Obama inherited an economy with 7.5% unemployment. While the economy never really recovered in eight years under FDR it also never got any worse than when he inherited it. If we see unemployment get into double digits or even worse into the teens, the dynamic facing President Obama will not be the same as the dynamic that faced FDR. This economy will get worse before it gets better. If it doesn't get better, that is something that the voters will hold President Obama for.

The second difference is the twenty four hour news cycle and the fragmented news media. The media was much easier to control when it was merely the networks and the msm. Now, we have the blogosphere, the new media, cable news, and talk radio along with the traditional media. Such a fragmented media environment means that no one person can control the message. Furthermore, the twenty four hour news cycle means a hyperanalysis of each and every policy. FDR's policies caused all sorts of corruption. The media simply didn't have enough resources to examine it intensely. It does now.

Finally, a lot more people are invested in the stock market than they were during the 1930's. 401k's and other retirment plans were minuscle or not even created. Now, more than half the population owns stocks in one way or another. FDR presided over a stagnant stock market his entire presidency, but that wasn't an issue then. That's because only the super wealthy owned stocks then. Not so anymore. If the stock market continues to perform as it has so far under his presidency, that is something a lot of people will notice.

So, while Obama and FDR have plenty of similarities. Those similarities lend themselves to excuse Obama from economic failure. Never fear conservatives. There are also very important differences and those differences mean that Obama will not have electoral excuses for economic failures the way that FDR did.

Mr. President: If You Really Want To Emulate Abraham Lincoln...

President Obama has a keen desire to emulate Abraham Lincoln. For instance, he took the oath of office on the very same Bible that Abraham Lincoln took it on. He took a train ride that mirrored the train ride that Lincoln took in anticipation of his own inauguration. They are of course both from Illinois. No doubt, President Obama would like nothing more than to one day be revered much like Lincoln was. The comparisons between he and Lincoln are rather immense considering that President Obama has only held the office for just more than 48 hours.

Of course, I would like to suggest to President Obama one point upon which he could emulate Lincoln. It is a point that in fact President Obama has decided to take an entirely different direction. During the Civil War Lincoln set up military tribunals to try war criminals. Now, he didn't try Confederate Soldiers in these tribunals. That's because Confederate soldiers, those captured, were considered POW's and held until the end of the war. Instead, Lincoln tried civilians that were illegally helping the Confederacy.

Now, some might claim that there is a difference between what Lincoln did and today. In fact, it is quite the same. The terrorists wear no uniforms. They commit illegal acts of war. So, much like those folks that Lincoln tried, they should be tried in front of military courts as well. Lincoln understood full well that during war time illegally contributing to the enemies' war effort is an illegal act of war.

In much the same way, terrorists wear no uniforms, target civilians, and thus they too are committing illegal acts of war. In fact, Barack Obama could look to a more recent President that he also emulates for guidance. FDR, during WWII, tried seven German saboteurs in a military court as well. These seven German spies entered our waters wearing civilian clothes and their mission was to target civilians in an attempt to create terror.

In the midst of World War II, two German submarines actually put men ashore at both of those locations. The invaders did not arrive with the intent of seizing and occupying territory, however. Their mission was sabotage. Their targets were some of the crown jewels of America’s industrial might: major hydroelectric plants, important aluminum factories, critical railroad tracks, bridges and canals–and the water supply system of New York City.

FDR understood full well that these spies weren't merely criminals. Instead, they were enemies, illegal ones at that, committing illegal war crimes. As such, FDR tried the saboteurs in a military court.

Yet, Barack Obama insists on trying terrorists, many currently held at GITMO, in civilian federal court. By doing so, he lowers their deeds to crimes. They didn't merely steal something, kill someone, or con someone. They attempted to put a plan into large buildings. Such an act is not a crime but rather an act of war, and an illegal one at that.

Barack Obama has maintained that we are in fact in the middle of a war. Yet, he reduces what our enemies have perpetrated, and continue to plot, to merely crimes when he insists on trying them in civilian courts. By lumping the terrorists in with common criminals, President Obama also lumps in their deeds with common crimes. Such thinking is dangerous. Their actions weren't merely crimes. They were acts of war and illegal ones at that. The place where they should be adjudicated is in a military court where illegal acts of war can be properly adjudicated.

President Obama should look to the example of two icons of the Presidency, two folks he clearly aspires to be, for guidance on this matter. If he really wants to emulate Lincoln and FDR, I would start with keeping the trials Al Qaeda in a military court where they belong.

The Silly Notion of Post Partisanship

If you want to create a spirited political debate, I suggest doing one of these two things. Tell a conservative that FDR's economic policies saved us from a perpetual depression. Also, tell a liberal that Ronald Reagan's economic policies saved us from Carter's stagflation and ushered in an era of economic growth. Here are two transcendant Presidential figures and yet nothing draws the ire of partisans than giving either any credit. It's in this context that I wonder about President Obama's proclamation that he will be post partisan. If Reagan and FDR didn't accomplish such a goal, how will he?

It is a confounding idea proposed by President Barack Obama. The idea that he will somehow be post partisan. This is one of those nice sounding concepts that's difficult to define, and in my opinion, impossible to attain. In his inauguration speech , here is what he said on the matter.

Now, there are some who question the scale of our ambitions - who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.

What the cynics fail to understand is that the ground has shifted beneath them - that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works - whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. And those of us who manage the public's dollars will be held to account - to spend wisely, reform bad habits, and do our business in the light of day - because only then can we restore the vital trust between a people and their government.

Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control - and that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our Gross Domestic Product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart - not out of charity, but because it is the surest route to our common good.

Barack Obama is fond of saying that he wants to get beyond partisanship and do what works, what is right. It appears that President Barack Obama has fallen for the common fallacy of debate. There is a massive difference between thinking you are right and actually being right. President Obama should realize that if he does what he thinks is right that this will NOT make him special as member of the exclusive club of Commander in Chiefs. I hope that almost all decisions, if not all, were made by those before him by those that thought that particular decision was right.

Yet, just because he does what he thinks is right, this doesn't mean he will suddenly become post partisan. So far, in the first forty eight hours of his Presidency two issues have come to the forefront. The first is the issue of the stimulus package. This is a massive spending bill with tax credits masquerading as tax cuts. No real conservative would ever in their right mind support this stimulus package. Nor would any conservative with anything near a megaphone hold their tongue in criticizing it. There is absolutely nothing post partisan about this stimulus.

The second issue is the issue of GITMO and enhanced interrogations. He will try and end both. There is no hawkish GWOT thinker that thinks either is a good idea. Once again, no hawkish GWOT thinker with anything near a megaphone will mute their criticisms of the decision to close GITMO and end enhanced interrogations. So, what exactly is post partisan about this?

Ironically enough, if Barack Obama were to look for a post partisan model he need only look at his predecessor. President Bush supported tax cuts, free trade, but also a prescription drug benefit and a massive bailout. There's absolutely nothing about this set of ideas that is partisan. We can only assume that President Bush proposed all of these things because he thought they were the right thing to do. Isn't that post partisan? President Bush was one of the most socially conservative Presidents. Yet, his immigration policy was rather liberal. He proclaimed his intention to run a humble foreign policy only to do a 180 degree turnaround following 9/11. None of this was done on a purely partisan level. We can only believe that President Bush did all of these things together because he thought they were right. Yet, we don't think of President Bush as anything near post partisan.

So, President Obama has one of the most liberal voting record. He's proposed nothing but liberal ideals. Yet, he wants us to believe he's post partisan. It appears that to him post partisan means his decisions are right and anyone that disagrees is no longer post partisan. If that's the case, not only is it terribly arrogant to the point of hubris, but he will be in for a big surprise when he finds that partisan opponents to any of his decisions will not be muted.

Point Counter Point on FDR's Economic Policy

It appears that among certain parts academia, media, and punditry we may have a debate that only such folks would find interesting. That debate is another analysis of FDR's economic policies. Here is my contribution to the debate. So far, I have mostly seen this debate centered on television, however, I just discovered this defense of FDR's economic policies. The defense comes down to these basic points.

On deeper examination, I discovered that the right bases its New Deal revisionism on the short-lived recession in a year straddling 1937 and 1938. But that was four years into Roosevelt's term -- four years marked by spectacular economic growth. Additionally, the fleeting decline happened not because of the New Deal's spending programs, but because Roosevelt momentarily listened to conservatives and backed off them. As Nobel-winning economist Paul Krugman notes, in 1937-38, FDR "was persuaded to balance the budget" and "cut spending and the economy went back down again."

To be sure, you can credibly argue that the New Deal had its share of problems. But overall, the numbers prove it helped -- rather than hurt -- the macroeconomy. "Excepting 1937-1938, unemployment fell each year of Roosevelt's first two terms [while] the U.S. economy grew at average annual growth rates of 9 percent to 10 percent," writes University of California historian Eric Rauchway.

...

According to Federal Reserve chairman Ben Bernanke, "Only with the New Deal's rehabilitation of the financial system in 1933-35 did the economy begin its slow emergence from the Great Depression." In fact, even famed conservative economist Milton Friedman admitted that the New Deal's Federal Deposit Insurance Corp. was "the structural change most conducive to monetary stability since ... the Civil War."

The absurdity of this piece reflects a lot more on the author, David Sirota, than it does on FDR himself. The defense comes down to FDR's New Deal worked because Paul Krugman, Ben Bernanke, and some historian say so. It's as though Sirota is oblivious to the idea that this question has been debated ad nauseum. Both sides can claim plenty of credibility in those that agree with their position.

What's really remarkable is how disjointed the argument is. For some reason Sirota is fixated on what happened in 1937-1938. What happened in those years is not nearly of most importance. Like I have said over and over, unemployment was still at 10% in 1940. How can you say the policy was such a success? Yes, unemployment dropped every year but that's because it started at 25%. Yes, GDP increased every year but it also cratered in 1930-1933. It's like a two hundred hitter boasting that their average has been up every year because he started in the majors as a one hundred hitter.

The intellectual laziness of Sirota is nothing short of obscene. The question of FDR's policies is something that people dedicate books to. Yet, he thinks he can come in, quote a couple important sounding people, isolate a couple years for no clear reason and say the case is closed. The case is nowhere near closed. It will be one of the most fascinating debates in some circles of the next few years.

Defending FDR's Legacy

Lately, it has almost become sport for many Conservatives to start attacking the legacy of FDR. There are several reasons for this. The first is of course that FDR is the penultimate liberal President. His legacy is pantamount to the future of liberalism. If his economic record is considered successful, it also opens up a pandora's box to all sorts of big government programs. The size of the government is a nearly never ending debate. FDR's economic record is standard Keynesian, and it forms the basis for much of liberal's defense of government spending to stimulate the economy. I, myself, have questioned FDR's economic record.

While FDR's record, is in my opinion, a matter of great debate. His overall record is beyond question. I believe that any President during war time is judged first, second, and last by his performance during that war. As such, FDR carried the U.S. through its most difficult war and we won that war. That speaks for itself.

Really though, his legacy is cemented because FDR pulled off the greatest foreign policy coups in history. Sometimes when we look back on histor, we see with a matter of fact something that was truly remarkable. That's, I believe, what we had with FDR. On the eve of WWII, FDR, along with Winston Churchill, was able to reach out to Joseph Stalin and convince Stalin that Adolph Hitler was a bigger threat to Stalin's own power base than an alliance with Britain and the U.S.

This may seem simple enough however Stalin was evil and a tyrant. The same could certainly be said of Adolph Hitler. In other words, FDR convinced Stalin that an individual just like him was a very real threat to him. Normally, despots and tyrants find each other. In this case, FDR was able to pit tyrants against each other. The significance of this cannot be overstated. Had Russia gotten into bed with Germany who knows how things would have turned out.

What is impossible to quantify is FDR's skills in staring down this evil, tyrannicall lunatic and being able to convince someone this irrational of something perfectly rational. The reality was that Hitler wanted to rule the whole entire world. As soon as he was done with Britain, France and the rest of Western Europe, it was only a matter of time before he got to Mother Russia. Stalin's aspirations reached beyond his border but he never wanted to rule the whole world. FDR and Churchill were able to convince Stalin that his own plans would eventually be compromised by Hitler.

Their marriage was one of extreme convenience. As soon as Hitler was eliminated, Stalin saw his recent allies as enemies, and what followed WWII was a prolonged Cold War. This only makes the coup that much more remarkable. Stalin never saw either FDR or Churchill as any real allies but rather those he could use for an immediate purpose. No doubt, both FDR and Churchill knew this quite well. That's why keeping him in line throughout their alliance is even more remarkable. It is this foreign policy coup that is rarely placed into the proper context. It's this that makes FDR's legacy one that puts him in a very special class.

Demand Side Vs. Supply Side Economics

A couple weeks back I put my hat into one of the most sophisticated economic arguments, monetary vs. fiscal policy. An argument that is even more sophisticated is one on supply vs. demand side economics. A demand sider, or often called a Keynesian, believes that getting an economy out of a rut requires stimulating demand. By this I mean that a demand sider would want to do things to stimulate consumer spending. A supply sider believes that the best way to stimulate an economy is to stimulate business investment. Now President Elect Obama is CLEARLY a demand sider. Since the beginning, he has staked out a position in which the middle class get more tax cuts, rebate, and spending so that the middle class spends more. His package includes only breaks for those in the middle. He has nothing for those on the supply side, the wealthy and businesses.

One of my problems with demand siders is I can never tell where politics end and where policy starts. It's easy to be a demand sider since it is also a very populist position. After all, you are giving to the class of people that has the bulk of the population, the middle class.

My main problem with demand siders is there is no solid evidence in history of demand side economics ever working. Supply side economic policy, on the other hand, has a fairly rich history of working. For instance, Ronald Reagan was a supply sider. He cut the top rate from 70% to 28% and within a couple years our economy was humming in what amounted to a near 25 year roll of economy prosperity. Ireland cut their corporate tax rates dramatically and it lead to a massive growth in that country's GDP. President Bush, 2001-2003, cut all taxes across the board and staved the economy from a serious depression and ultimately lead to a period of growth that lasted five years, until recently of course. JFK made similar tax cuts with similar results as well.

Demand siders often point to FDR, but as I analyzed, his economic record is rather complicated. Others point to the Clinton years, though it's still unclear to me what Clinton did to stimulate the economy. Besides these two examples, one is hard pressed to show any historical examples of demand side economics working.

One of the reasons that demand side economics has such popularity is the media's total distortion of the two policies. Because Republicans are most commonly associated with supply side economics, its effectiveness is downplayed. Whereas it is Democrats that are more commonly associated with demand side economics, and thus, the media plays up its effectiveness. For instance, George Bush rarely gets credit in the media for the effectiveness of his tax cuts. Clinton's economic policies are played up. FDR has been so lionized that his economic policies have been played up way beyond their actual effectiveness in my opinion.

As such, we are about to enter a period of serious economic malaise with an economic policy that is totally unproven. Rather than cutting taxes that have worked in the past. Rather than going with a strategy that has a history of effectiveness we are going with one that has scant evidence it works. This incarnation of demand side economics may in fact work but if it does, it will be the first time, from my view.

Examining FDR's Economic Record

To really examine FDR's economic record it would take much more space than merely a blog post, however a full examination of his economic record is critical now. That's because many pundits are pushing President Elect Obama to create a New, New Deal. Those pushing Obama in such a direction work under the assumption that FDR's New Deal was a shining beacon of success. FDR has properly been lionized as a President however with this lionization there comes a rather rose colored glasses look at his entire Presidency. In my opinion, FDR deserves a special place in our pantheon of Presidents, and that's because he lead the U.S. through WWII. Any wartime President will always be defined by their success or failure in war. I doubt anyone can tell me any part of Lincoln's record beside that of successfully prosecuting the Civil War. The Great Society has little place in LBJ's legacy because of the Vietnam War. The same is true of FDR.

Still, I firmly believe that FDR is given economic credit where frankly he doesn't deserve it. As such, FDR's policy of massive government spending, massive government expansion, and massive government intervention are all given historical precedent as being successful. I believe a firm examination of his economic record reveals something a lot more complicated.

First, FDR was given quite the economic malaise to begin his Presidency. He walked in with unemployment at 25%. It's important to examine his record in the context of the most extreme and difficult circumstances. It isn't a minor point though that unemployment was still double digits as we entered WWII . By any economic measure, if the economy is still in malaise eight years after taking over, it is not unfair to say that the President's economic platform was a failure. Reagan was given only a smaller mess when he entered office. He faced stagflation, and yet only three years later the economy was booming. FDR shrewdly continued to blame Hoover into 1940 for the continued high unemployment but history should not be so kind.

Clearly, as you can see from this chart, FDR certainly presided over an expansion of our GDP. Two things need to be kept in mind. First, our economy had been so crushed that it really had nowhere to go but up. Once, he stopped the proverbial bleedin with the 100 days and begin unadulterated spending, the economy was bound to start expanding. Second, I don't think anyone doubts that massive new government spending will expand the economy.

The question is at what price will that expansion come. The reason that FDR's economic expansion was largely a "jobless recovery" is in my opinion two fold. First, when it is government "creating the jobs", that creation largely doesn't spill over into the private sector. Second, he combined this massive new government spending with the introduction of several new taxes. The most corrosive was the introduction of the payroll tax, now known as Social Security. Beyond this, FDR raised the inheritance tax on more than occasion throughout his first term. Because FDR has been so lionized, most people never once point out the futility of these actions and how the stunted job creation. As such, we have a President that literally promised to raise some of the very same taxes in a similar economic donwturn and a country that bought this hook, line and sinker, even though history clearly shows that such moves stunted job growth.

What's rarely discussed about FDR's record is the long term corrosive effects of his policies on future generations. It was FDR after all that first introduced what I refer to as the Ponzi Scheme known as Social Security. We can all thank FDR for a program that takes an extra 7.5% of our incomes (up to $102,000), and will likely be bankrupt before most young people get a chance to enjoy its benefits. Yet, FDR also was responsible for the creation of Fannie Mae. FDR saw home ownership as far too vital for the free market so he created Fannie Mae to securitize loans. By doing so, he created a mortgage market that became monopolized. A lot of the current mortgage problems can be traced back to the structure that FDR created. He also created the Federal Farm Board. This was then a roughly $60 million program that would buy up crops from struggling farmers. The program has grown to north of $100 billion and continues to prop up failing farmers today. In fact, it was FDR that first set in motion the monster of ever increasing government.

So, now we must all ask some very important questions. Is it really such a good idea to allow our government to spend us out of a recession? Is allowing the government mass expansion the sort of thing that will do good or harm in the long run? Is raising taxes on the very rich really the right thing to do in an economic downturn? It is all of these quesitons that are largely overlooked because FDR has been so lionized. His economic record should be examined much more closely or we will face the fate of its second coming.

President Elect Obama: Something Doesn't Add Up

Yesterday, President Elect Obama announced his economic stimulus proposal.

The president-elect said he wanted Congress to act “right away” on a stimulus measure that would blend spending and tax cuts. Asked for details, he said without elaboration that he wanted a measure “of a size and scope that is necessary to get this economy back on track.”

Democratic officials in Congress said the stimulus plan could include aid to cash-strapped states to provide health care to the poor, along with road and bridge funds. More money for food stamps is also likely, they said.

Obama renewed his campaign-long call for middle-class tax cuts but said he would let his advisers make a recommendation on whether to roll back Bush-era tax cuts for the wealthy.He offered few details about the economic stimulus measure he wanted from the new Congress, saying he would ask his new team of advisers to consult with lawmakers.

As a candidate, he supported a $175 billion measure, but the economy has worsened since then, and many lawmakers and economists argue for a more robust jolt. Obama said his goal was to create 2.5 million jobs by “rebuilding our infrastructure, our roads, our bridges, modernizing our schools and creating the clean-energy infrastructure of the 21st century.”

Today, here is what President Elect Obama said about fiscal restraint.

We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group," he said.

Obama said he would ask his economic team to "think anew and act anew" to meet new challenges.

"We will go through our federal budget -- page by page, line by line -- eliminating those programs we don't need, and insisting that those we do operate in a sensible cost-effective way," Obama said.

Herein lies the rub, as Shakespeare might say. President Elect Obama wants to stimulate the economy through increased government spending. He wants to create jobs through a series of public works projects like building roads, bridges and highways. At the same time, he wants to cut funding to projects and programs that he thinks are inefficient and no longer useful. The problem is that cutting those programs would contract jobs.

Let's say the government is funding some useless study on mice. While there maybe no reason to fund this study, the funding creates jobs. Whoever receives said grant hires researchers, rents space, buys equipment. Some of the research may even be outsourced. The project may even hire consultants. All of this goes to expand the economy. This program may in fact be inefficient and even worthless but it also creates jobs. Cutting it will cut jobs. Cutting a mass number of wasteful programs will also cut a mass number of jobs.

What President Elect Obama is going to realize soon is that any plan in which the government leads in job creation is not a plan in which efficiency is of any priority. FDR didn't begin cutting "inefficient programs" while he expanded government. It would have been a counter productive move. Barack Obama will take jobs out of the economy at the same time he is putting jobs into the economy. What Barack Obama is proposing is creating jobs through one set of new government spending while at the same time cutting jobs through the elimination of other government spending. Does anyone else see this as totally fallacious?

This of course exposes the fallacy of using the government as the driver of economic growth. In order for any such plan to work it requires a massive growth in the size, scope, and spending of government. You can't cut government spending and expect the government to create jobs. Ultimately, the success of Obama's plan will come down to just how efficiently the new spending will be compared to how inefficient the old spending was. Even if Obama is able to spend efficiently the gains will still be marginal. In Barack Obama's plan, there is nothing to stimulate job growth in the private sector (like the plan I developed) In such a plan, making government more efficient is vital. Instead, President Elect Obama's plan relies on making the government as big, powerful, and expansive as possible. Such is, in my opinion, a recipe for economic disaster.

President Elect Obama is in Need of a History and Math Lesson

President Elect Obama unveiled most of his economic team today as well as the blue print for his economic recovery package.

President-elect Barack Obama unveiled key elements of his blueprint for turning around the economy -- and the team tasked with making it work -- including a massive stimulus package and tax cuts for a "vast majority" of Americans paid for by the nation's "wealthiest."

Against a backdrop of increasing calls for him to establish a viable economic rescue plan well before he takes office on Jan. 20, Obama said reforms in Washington will be needed to create a "sustainable economy," including larger contributions from taxpayers earning more than $250,000 per year.

"We've got to restore some balance to our tax code and the Bush tax cuts were disproportionately targeted to the very wealthiest Americans -- those who were making more than a quarter million dollars a year can afford to pay a little more," the president-elect said.

"And it is important if we're going to help pay for some of these expenditures that are absolutely necessary to get our economy back on track that those who are in a position to pay a little more do so. Whether that's done through repeal or whether that's done because the Bush tax cuts are not renewed is something that my economic team will be providing me a recommendation on," he said.

Saying his priority is to create 2.5 million jobs and sustain economic growth over the long term are his priorities, Obama on Monday named Timothy Geithner as his choice for Treasury secretary and Lawrence Summers as head of the National Economic Council.

This economic recovery proposal has both a math problem and a history problem. The proposal will cost somewhere between $500 billion and $700 billion. Yet, President Elect Obama says he will pay for it by raising taxes on the wealthiest 5%. This is an absurd distortion of basic math. Raising taxes on the wealthiest Americans will likely net no more than $75 billion in extra receipts and that assumes that most of this won't be eaten away as a result of the weakened economy. That leaves somewhere between $400 and $600 billion unaccounted for. In other words, this is NOT paid for. Rather, we are going to needlessly raise tax on the job creators in order to slightly reduce the massive addition to our budget deficit that his proposal will create.

Obama's second problem is even more troubling. His proposal total dismisses all economic lessons of history. FDR also raised taxes while increasing government spending exponentially during the Depression, and this policy caused our economy to still be in a Depression when he campaigned for President in 1940. That's because the stimulus of increased government spending was combined with the contraction of taking money away from those that create jobs in the private sector.

President Elect Obama continues to cling to the very destructive and faulty notion that if someone can afford higher taxes that this means there are no consequences with making them pay higher taxes.

Just because the wealthy will still be wealthy even while they pay more taxes, doesn't mean this extra tax burden won't contract the economy. The money that Obama is taking from these folks could be used to buy a second home, an investment property, a building, a business, a mutual fund, a stock, or even just simply be deposited into their bank. We no longer live in a world where money is kept in a mattress, and that means any extra tax is money taken out of the economy. The disaster of such a policy in the Great Depression is all the history lesson we need to see where such a policy will take us.

It appears that President Elect Obama is determined to impose income redistribution on our economy in the middle of a serious recession. This sort of social engineering is problematic enough during relatively good times. It is a total and unmitigated disaster during the current economic period.

The Far Left Economic Mindset

Anyone that is frightened by what economic horror the policies of an Obama administration may bring only needs to read this piece by William Jones to know their fear is not without merit. Jones attempts to draw comparisons between what Obama may do and every liberal's favorite economic Presidency, that of FDR. It isn't merely the positive connections that Jones draws, but rather the missed opportunities of FDR's administration that Jones hopes Obama won't miss. Here are the most relevant parts.

Obama invoked that legacy repeatedly during the campaign, from the account of how his grandfather benefited from the GI Bill to his proposals to create jobs and economic growth through federal investment in education, industrial innovation and infrastructure. Such rhetoric allowed him to claim the legacy of the most popular and successful government programs in American history, but it also displayed some of the limitations of New Deal policies, particularly in their ability to address racial inequality. We can thus turn to the history of those programs for an indication of how the Obama administration will confront the interrelated problems of economic and racial inequality in the twenty-first-century United States.

Despite conservatives' alarm about "the slippery slope to socialism," Franklin Roosevelt displayed a strong aversion to direct control over the economy. Instead, his administration relied on civil society groups to implement and enforce government policies. Rather than impose wage and price regulations to stabilize the economy, for example, the National Recovery Administration allowed business associations to establish standards and then empowered unions to enforce them. That unprecedented mobilization of civil society sowed the seeds for the industrial union movement, which proved critical to Roosevelt's re-election in 1936 and deepened his commitment to social democratic reform in the late 1930s and early '40s.

...

But there is a more troubling side to the New Deal's legacy, which will not be resolved through populist appeals to the struggling middle class. A growing body of scholarly literature has shown that the same reliance on civil society that inspired the labor movement also prevented the Roosevelt administration from addressing deeply ingrained racial inequalities. While unions improved wages and conditions for industrial workers, they had little impact on the agricultural and service sectors, where the vast majority of blacks and Latinos labored for low wages without collective bargaining rights, health insurance or even Social Security. The GI Bill offered mortgage assistance and scholarships to all veterans but did nothing to ensure that African-Americans could use those benefits to attend segregated colleges or buy homes in segregated neighborhoods. Indeed, had Obama's paternal grandparents lived in the United States it is unlikely they would have shared the sepia-toned vision of the New Deal era that was so pervasive in his campaign material.

...

President-elect Obama has an opportunity to further racial and economic justice by fusing the New Deal and civil rights traditions. He expressed that link directly in Philadelphia in March, when he insisted that unless Americans confront racial inequality directly, they will "never be able to come together and solve challenges like healthcare, or education, or the need to find good jobs for every American." Such a confrontation would entail strengthening the Equal Employment Opportunity Commission and other civil rights agencies, while addressing racial inequalities in primary school funding, economic development and incarceration. Just as the GI Bill benefited white veterans more than black ones, race-neutral policies are likely to exacerbate existing inequalities.

This piece, and the thoughts behind it, have three frightening ideas. If these ideas are taken by President Obama then I believe we are headed toward economic disaster.



1) The lionization of FDR's New Deal



FDR casts a massive historical shadow, however one of the unfortunate by products of this is that he gets all sorts of economic credit he simply doesn't deserve. I say it over and over but it's worth repeating, unemployment was still more than ten percent in 1940. Of course, GDP began growing only about a year plus after he took office, however given how much he spent, it better have. Still, he didn't necessarily bring jobs back to the nation. Furthermore, the by product of FDR's New Deal is that we have a bunch of failing and flawed government programs like Social Security, Medicaid and Fannie Mae. If FDR is the model we choose, it is the wrong model.



Reagan, it could be argued, took over an economy in just as bad a shape. We not only had double digit unemployment but interest rates and inflation. Within three years though, the economy not only turned around but took off. Unlike FDR, Reagan relied on tax cuts to spur the economy. FDR relied on government spending. The results speak for themselves. If FDR is Obama's model, we may still have double digit unemployment come 2016.



2) The insistence on all or nothing socialism.



Jones uses the same M.O. as most liberals in dismissing Obama's and FDR's pseudo Socialism. Unless either is a full blown Socialist, all fears are overblown. Yes it's true, FDR didn't nationalize everything and give total control to the federal government. That doesn't mean that there wasn't plenty to fear from FDR's Socialistic tendencies. He partially socialized health care, retirement, and housing, and each of those programs (Medicare, Social Security, and Fannie Mae) are a burden on our economy to this day. He presided over the biggest expansion of government in the history of our nation and it's only gotten bigger since then. If Barack Obama expands the government as much FDR did, we will face a bureaucracy that will get in the way of everyone and everything.



3) Economic recovery isn't enough. We also need economic justice or social engineering.



We already know that Barack Obama has an affinity for economic justice or social engineering. He said as much in his infamous 2001 WBEZ inteview.



The far left isn't merely content with President Obama fixing the economy. The far left wants him to engage in social engineering through eupimisms like "social and economic justice". Jones wants Obama to create policy that will lift up African Americans, and he wants Obama to create programs that even out the playing field.

The far left will have President Obama's ear and they won't merely demand a new New Deal. Furthermore, they will demand that this version of the New Deal not only lifts our economy but creates some sort of social equality. Furthermore, unless it is entirely Socialist, we need not worry about any of the policies that get us there.