The Myth of the Recovery
The White House claims the economy is on the mend. That’s a fantasy.
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GoogleThe economic headlines sure look better than they did a year ago. Gross domestic product (GDP) is finally growing again, rising by 2.2 percent in the third quarter of 2009, with an early estimate of 5.7 percent for the fourth. The fourth quarter number will probably be revised down, but it will still likely mark the fastest growth since 2003. The unemployment rate, after a nosedive, leveled off in the last few months of the year, and the stock market has regained 40 percent of its value after a March 2009 low. Four of the five largest bailed-out banks have either repaid the government or received permission from the Treasury Department to do so in the near future. Inflation slowed to a standstill in November after 10 months of increasing consumer prices. Construction of new homes and apartments increased in 2009 from 2008 levels, the first annual growth in housing starts since 2005.
“The Recovery Act has created jobs and spurred growth,” President Barack Obama said in a December speech trumpeting the success of his economic policies. “We are in a very different place today than we were a year ago.” Lawrence Summers, director of the White House National Economic Council, concurs. “Everybody agrees that the recession is over,” Summers said that same month on ABC’s This Week.
But a closer look reveals those appealing numbers sit on a dangerously shaky foundation. Economic growth in 2009 was largely dependent on a historic level of government spending that even the president acknowledges is unsustainable in the long term. The root problem of mortgage delinquencies has yet to be worked out. Bank lending is sparse amid ongoing uncertainties surrounding regulatory reform. As a result, manufacturers and small businesses continue to struggle with limited credit. All that translates into historic job losses and a bleak outlook for meaningful growth in 2010 and 2011.
Worst of all, many of the core problems in the housing, banking, manufacturing, and service sectors are being perpetuated and exacerbated by the very federal programs the president credits with jump-starting economic growth. Instead of confronting the roots of the crisis head on, as Obama has repeatedly boasted of doing, his administration and the Democratic Congress have kicked the can down the road, postponing the day of reckoning for real estate, the auto industry, and the toxic mortgage-backed securities that were at the heart of the economic meltdown. These unsolved problems will keep looming over the economy until they’re finally addressed.
Government Domestic Product
The much-noted “jobless recovery” is not just a problem. It’s an anomaly. Not since the post–World War II recession in 1945 has unemployment risen this quickly: five percentage points in the 24 months after the downturn began in December 2007.
To put that in perspective, it took 43 months for unemployment to hit its peak during the 1979–82 recession. In 2009 alone the economy shed a staggering 3.9 million jobs. And though the headline unemployment rate stabilized at 10 percent during the final months of the year—17.3 percent if you include part-time workers—initial jobless claims for January 2010 jumped at a rate not seen since the previous August. It’s not at all clear the worst is behind us.
The gains on Wall Street have been goosed largely by government spending and guarantees, not the usual private sector–funded growth. And federal spending cannot continue indefinitely without deficits and debt service spiraling out of control. John Silvia, chief economist for Wells Fargo, says, “We have seen a recovery, but it’s driven primarily by federal spending and special federal projects. The character of this recovery is very different than we’re used to.”
Consider that 37 percent of the third-quarter GDP growth was due to motor vehicle purchases, which were stimulated almost entirely by the Cash for Clunkers program. “The third quarter was really just a lot of Cash for Clunkers spending that won’t be sustained in the foreseeable future,” Silvia says. (Final statistics for fourth quarter spending were not available at press time.)
The car scheme, an attempt to jump-start the bankrupt auto industry, offered consumers a government-funded credit of up to $4,500 if they traded in their gas guzzlers for more eco-friendly vehicles. But since most participants probably were already planning to buy a new car, the program essentially shifted future demand for automobiles to the third quarter of 2009. Instead of continuing to grow, car sales dropped 34 percent immediately after the program ended. Figure 1 shows U.S. auto sales in 2009 largely following the 10-year average month-to-month change until the Cash for Clunkers credit jolted demand, followed by a subnormal drop.
Another 20 percent of third-quarter GDP growth came from new residential investments, propped up largely by the First-Time Homebuyer Credit. The credit was first offered in 2008 as a federally backed no-interest loan of up to $7,500, paid back over 15 years. The February 2009 stimulus package extended the program to September, increased the maximum to $8,000, and eliminated the repayment requirement. With the free cash giveaway set to expire at the end of the third quarter, builders and buyers rushed to close on homes, concentrating larger than normal residential investment into third-quarter GDP. Due to the “success” of the program, the credit has been extended again until April 2010. But the program has only helped individual buyers and sellers, not the housing market as a whole.
A Wells Fargo survey found that 56 percent of home-buyers who purchased a home in the second or third quarter of 2009 did so because of the special tax incentive. Such federal jiggering not only steals demand from the future, distorting growth numbers; it skews recovery in the real estate market. Housing prices are up in 2010 from a year ago, but that is because the government is giving away money to buy homes. The $8,000 giveaway pushes up the costs of all homes, not just the ones purchased with the credit, because sellers have raised their prices in anticipation of a buyer armed with stimulus cash. The credit suggests an increase in demand that isn’t really there.
The growth in the housing market that the White House brags about is inherently unsustainable. Home prices would not be up without the government’s support, and they will decline once the support is removed. That’s one reason Congress extended the First-Time Homebuyer Credit, even though it only puts off the inevitable and creates more problems. This skewed demand creates the possibility that homes will be constructed by builders who mistakenly believe the market is reviving, when in fact it is only Uncle Sam subsidizing a buying spree until the money runs out.
Overall, government support accounts for roughly 77 percent of economic growth in the third quarter of 2009, according to my analysis of Commerce Department statistics. This means that non-Washington GDP growth was closer to 0.34 percent from July to September 2009, instead of 2.2 percent.
Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.
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The other day, when the unemployment numbers came out, some dope was braying about how the Presidential Suit's economic policies had "slowed the rate of decline" and were therefor a raging success.
Eventually, you just run out of people to lay off, no matter what the yuks in the White House are doing.
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Prosperity is just around the corner! I'm starting to think of him as Herbert Clark Obama.
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A few minutes ago I heard Randi Rhodes on my car radio saying the stimulus is definitely working 'cause there's been an increase in employment for such jobs as teachers, firefighters and such like. She figures that's what it was supposed to do and "the right" (I guess that includes libertarians) should stop complaining about funding going to help this sector create jobs. She fails to mention of course, that in the recent past, the largest source of new jobs in the country have been small businesses, not governments.
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What she doesn't realize is that every single government job is a job that has been transferred from the private sector, not a job that has been added to the private sector.
And that's a best case scenario. Leaving aside the government jobs which have the operational effect of reducing private sector employment, the task of collecting and allocating the funds for the government job means there is some loss along the way.
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There is also the fact that no matter how many new government jobs are created, none of them bring in enough taxes to fund the cost of the salaries for those jobs. That means the money has to come from some non-government jobs, or borrowing, etc. I would think that to be a net drain on the economy.
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You are wrongin your comment,you did not mention that for every dollar the job holder spends it generates 3 dollars om main street.
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You are wrongin your comment,you did not mention that for every dollar the job holder spends it generates 3 dollars om main street.
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"David Parshall, general partner at private equity secondary PEI Funds, warns that badly designed changes could hurt the economy even more than the uncertainty about them."
So what's the track record of getting *well* designed changes in anything like this?
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I heard Randi Rhodes on my car radio saying the stimulus is definitely working
Sounds like a porn star.
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Looks like one, too. From the 70s.
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"Randi Rhodes gets ridden hard and put away wet." ;-)
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She looks like Al Franken in drag and without glasses.
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., let's see what you look like
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is the 2nd time this week that my reply is: I'll have to order a strap-on.
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JUANITA!? Is that you?
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I only like virgins;-)
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Reminds me of Ozzy's guitarist in the 80's
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This could be an 80's guitarist...
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Conventional wisdom presupposes that the economy should recover. Not necessarily so -- there's a piper here to pay.
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Pay me or I'll drop off all these snakes and REALLY fuck up your economy
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Of course the administration's claims are myth because their premise is based on Keynesenian economic theory - which itself is a myth.
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There's nothing wrong with Keynes, it's just politically unfeasable, and leads to long term stagnation. Keynes said to tax the boom & stimulate the bust.
Nobody's ever been willing to tax the boom.
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There's plenty wrong with Keynes.
Government spending is nothing more than forced transfer payments.
It creates no net benefit whatsoever.
The detriment to the transferors completely cancels out the benefit to the transferees.
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There's everything wring with Keynes. Put simply they only look at one side of the ledger. They talk about how spending creates spending, but they ignore the spending that didn't happen because of the transfer that would have created spending.
The idea that government can add value to the process is preposterous on it's face and history is abundantly clear on the issue.
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Agreed, Obama's people are simply not telling the truth to the American people.
Unemployment worsened in January 2010 in 30 states, and hit all time highs in 5 states.
Unemployment Surges, Reaches All-Time High in 5 States in January 2010 http://tiny.cc/iYamB
Further, the February 2010 budget deficit hit an alltime high bc of transfer payments.
February 2010: Largest Monthly Budget Deficit in American History http://bit.ly/aU1hpX
Media won't even rebut the Obama advisor fantasies tho
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The worst part of all of these troubles is that a lot of people know these entitlement and "recovery" policies are rotten and still shrug it off, thinking this is America and somehow we are "too big to fail" ourselves. As if we will just "come up" with 13Trillion dollars and be a solvent country again tomorrow. We've been lulled to sleep for so long, nobody is ready to accept that entitlements have to go away in order to recover. It's almost as if personal responsibility has become so terrifying to people, they'd rather die on the government's leash than stand on their own two feet and make the tough decisions for themselves. So sad for this once proud country...
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Sad part is that it all happened so quickly. Maybe once the eternal-adolescent boomers are gone we can pick up the pieces.
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'As President in 1901, Roosevelt held the ideal that the Government should be the great arbiter of the conflicting economic forces in the Nation, especially between capital and labor.'
Wow it did happen quickly, we had NO chance to see this coming.
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If you keep telling the American people that everything is getting better, then eventually people will believe this and things will really start getting better. The government is trying to brainwash everyone with optimism, and it might work. At least up until when the rioting starts.
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This is the core myth of Disney economics. The jobs lost are real because the spending is real and the bill comes due no matter what you 'believe'.
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But the program has only helped individual buyers and sellers, not the housing market as a whole.
I just came to point out that statement is an outrageous falsehood. The house buyer bribe absolutely did not help buyers, who would have otherwise seen prices go much lower.
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Indeed, just as serious, responsible homebuyers watched prices soar during the bubble thanks to the ease with which irresponsible people could obtain homne loans. It's called "inflation," and that particular mistake has cost us hundreds of billions, if not trillions.
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Which just screwed those responsible people who tried to save up money first and buy something they could actually afford.
When you stop and think about it, it's really nuts to spend 30 years paying for your house. How else can you afford a $400K house? By not buying a $400K house! Prices would never have skyrocketed so high without this artificial bubble, but there is also some 'keeping up with the Joneses' mentality among buyers, too.
I admit I also think it's absurd to spend 5-7 years paying for a car. It's a way to get back and forth to work! These are just two ways that everyone has been living on a bubble for the past twenty years. Throw in over-priced college degrees and hefty credit card balances, and you've pretty much got the list of stuff the government wants to throw money at.
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"If you tell a big enough lie and tell it frequently enough, it will be believed."
Adolf Hitler*disclaimer* I am in no way comparing Obama to Hitler.
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Because Hitler meant it. Obama just wants to be "clear".
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Yep, clear as mud.
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Thanks for bringing it up, just the same
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She fails to mention of course, that in the recent past, the largest source of new jobs in the country have been small businesses, not governments.
Hmm. Has anyone seen any new small governments start up lately?
It's Smart Ass Scrooge for today.
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If the economy is recovering under Obama's polices then I have an oil reserve in backyard.
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Drill baby drill!
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If I'm not mistaken, Reason still hews to an open-borders mentality on immigration. Simply put, you do not solve the problems of a modern, high-tech, First World economy by importing millions of illiterate peasants whose children have 50% dropout rates AND THEN providing these economic underperformers with First World levels of government benefits. Soaring budget deficits are the inevitable result.
And that unemployment number will remain stubbornly high so long as immigration rates remain similar to what they were during the economic boom. The economy is creating jobs, but not any faster than immigrants are arriving.
Brace yourselves: it's a long fall from here, and we've only just begun.
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WJ Alden
+5
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If the government stopped providing benefits, and allowed people to succeed or die based on their work, then immigration could be infinitely sustainable. The type of immigrants coming to a nation that guarantees nothing but the product of your own labor is different then the ones we've been getting lately.
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A libertarian's wet dream. Like the one of me with Laetitia Casta, it will never come true.
The United States is, in a very real sense, property. That which isn't owned separately, like a home or business, is owned jointly by its citizens. That includes schools, roads, sewers, bridges, dams, prisons, and government buildings of all kinds; national parks, national forests, watersheds, waterways, mineral rights, military hardware, ad infinitum - all paid for either in blood or in taxes: my taxes, your taxes, our ancestors' taxes and blood.
The people who come here as immigrants are receiving all of that for free.
Life is not just but about economics, and people are not just units of labor, but that's what purist libertarians would reduce it all to.
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I'm a 50 year old IT worker. I have a job but noticed that the headhunter calls and emails dried up over the last 10 months or so.
In the last few weeks I have received 10 or so emails and actually got a call yesterday from a headhunter.
I'm hoping that the economy is recovering.
I don't think obama's stimulus has anything to do with it, if anything it (and just about everything else he does) hurting the recovery.
After a while the pent up demand will start something. We'd probably already be in recovery if obama and the rest of the nutters had just let things alone for the last 15 months
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The White House has been claiming we're in a recovery since Obama first set foot in the White House 15 MONTHS AGO.
Still no recovery. But don't worry! The rising unemployment numbers mean that recovery is right around the corner! -
Changes in the stock market from a year ago have little to do with improvements in our economy if you measure our economy in terms of full employment.
Barack Obama, our Marxist ideologue in the White House and the Democrats in Congress are destroying our economy. They REFUSE to do what is necessary to create GROWTH in the private sector - cut personal and corporate taxes for a start.
We have incredibly incompetent SOCIALISTS and Progressives (Communists) pushing these outrageous idiotic plans (Government Control of Healthcare and Cap and TAX). The American People will begin cleaning house in November.
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"The problem with Socialism is that sooner or later you
will run out of other peoples money." Margret Thatcher, former PM United Kingdom.It's happening to us now.
This is important. It once again proves that those who don't learn from history are bound to do the same things over and over.
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"The problem with Socialism is that sooner or later you
will run out of other peoples money." Margret Thatcher, former PM United Kingdom.It's happening to us now.
This is important. It once again proves that those who don't learn from history are bound to do the same things over and over.
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November is too late
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I run the lender division for the most well known website that matches small businesses seeking funding with the lenders that provide such.
We have had to include in our business model new vertical markets such as debt restructuring co's and credit repair co's due to the fact that our revenue comes from the lender side , not the borrower side.
As such, the lenders are not lending and therefore not buying our leads and we had to fill that void of revenue with new markets.
The credit market for small businesses is FROZEN.
Up to 70% of new jobs come from small businesses. They are NOT getting the capital they need to grow, improve or even stay in business.
This so-called growth is artificial. Period. Until the housing and small business industry improves, we will be stagnant. Period.
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"The problem with Socialism is that sooner or later you
will run out of other peoples money." Margret Thatcher, former PM United Kingdom.It's happening to us now.
This is important. It once again proves that those who don't learn from history and bound to do the same things over and over.
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