It’s the Uncertainty, Stupid

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.

After tax cuts first proposed by John F. Kennedy in 1961 became law in early 1964, the economy boomed. Annual growth averaged over 6% during the next three years.

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.

The seasonally adjusted unemployment rate has been over 9% for fourteen consecutive months, and seems certain to break the record for the longest such string (18) since the government began reporting monthly results in 1948. On a population-adjusted basis, the actual number of housing starts in June (i.e., before seasonal adjustment) was the lowest on record for any June since such records have been kept — by over 50%. Foreclosures are on track to break another annual record. Factory output fell in June. Retail sales went negative during May and June. Federal tax collections are still plummeting; only remittances from the Fed are keeping year-over-year receipts from diving further. Do I really need to go on?

Getting back to Ben Bernanke, it’s important to remember that the Fed chairman has extensively studied the Great Depression and understands its monetary lessons. He agrees with the late Milton Friedman that serious Fed policy blunders added to its depth, telling the Nobel laureate in 2002: “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

But there’s only so much Ben and the Fed can do. In Congressional testimony, Bernanke essentially admitted that he has done virtually all he can:

[E}ven as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain.

That, friends, is a de facto admission of impotence.

Ben really can’t do anything about our atmosphere of “unusual uncertainty,” because he didn’t create it. Nancy Pelosi, Barack Obama, and Harry Reid did that just over two years ago by establishing what I have been calling the POR (Pelosi-Obama-Reid) economy ever since. It was in June of 2008 that these three demonstrated that they would act as ruthless redistributionist statists if they achieved monopoly power over the presidency and Congress. Their energy-starving environmental proposals, their near giddiness over the prospect of massive tax increases, and their fundamental hostility towards capitalism, free markets, wealth creation, and even the rule of law became all too apparent to those not wearing Beltway blinders. Entrepreneurs, investors, and businesspeople began pulling to the sidelines. Their expansion and hiring plans began to go on hold. They began stripping ongoing operations down to bare essentials.

The pullback by the productive accelerated two months later. The frauds by design known as Fannie Mae and Freddie Mac imploded, while Congress got stampeded into setting up the $750 billion slush fund we now know as TARP. Obama’s funny money-aided election convinced all but the snookered (I’m talking to you, Mort Zuckerman) that unacceptable uncertainty was about to become a permanent part of the economic landscape.

If you think the uncertainty is bad now, look at what’s coming. How many yet to be discovered daggers to personal and economic freedom lie in the thousands of pages of signed but largely unread legislation? How much more damage will be done when unelected, job security-conscious technocrats add tens of thousands of pages of regulations into the mix?

I don’t see how the uncertain business environment can improve as long as the current bunch is in charge. Ben Bernanke can’t make things better. Only voters can — maybe.