In testimony before Congress last Wednesday, Federal Reserve Chairman Ben Bernanke sounded as downbeat as someone in his position is probably allowed to be. That’s not surprising. The economy is not performing at as it should at this stage of a “recovery.”
The most visible reason why Ben is a borderline bear is because the Obama administration attempted to turn things around with an FDR-like “stimulus” instead of what has historically worked in both Democratic and Republican administrations when tried: tax cuts, tax simplification, and regulatory reform.
In 1984, the first year when Ronald Reagan’s tax cuts of 25% went into full effect, the economy grew by 7.2%. Growth averaged 3.7% during the rest of the decade, helped along in 1986 when the tax code was simplified down to a very few marginal rates.
In the third quarter of 2003, after George W. Bush’s relatively small tax cuts on income and investments became law, the economy grew at an annualized 6.9%. Despite being hampered by the unproductive busywork mandated by Sarbanes Oxley — a handicap still holding us back that no one seems willing to talk about — economic growth averaged 2.8% during the next dozen quarters.
But despite the steepest four-quarter contraction since the Great Depression, after which one would reasonably expect a brisk uptick, the Obama economy’s rebound, if it’s even fair to call it that, has been disappointing. The high-water mark for growth since the recession as normal people define it ended was the annualized 5.6% in the final quarter of last year. That’s not bad, but no one expects anything resembling a repeat of this performance while this administration’s current economic policies and postures remain in place. Even if growth somehow remains nominally impressive, employment is barely growing. The talk of the town both on Main Street and Wall Street is whether we’re heading into a double-dip recession. Some legitimately smart people think it has already started.
History should have told Team Obama that its statist stimulus strategy was doomed to failure. The Roosevelt administration’s continued stimulus during the 1930s failed to bring the unemployment rate below 12%. Meanwhile, Europe’s unemployment rate during that decade was actually lower. Japan tried a decade of aggressive stimulus during the 1990s. By the end of the “lost decade,” a former Asian powerhouse had morphed into a zombie economy.
But the pseudo-smarties at Team Obama thought they could defy history. They couldn’t. The administration can trot out its otherworldly “Recovery Summer” and “jobs created or saved” rhetoric all it wants, but the fact that their stimulus strategy has failed to adequately revive the economy is no longer arguable.