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Is the US Economy Recovering or Isn't It?

Economics / Economic Recovery May 10, 2010 - 10:27 AM GMT

By: Gerard_Jackson


Best Financial Markets Analysis ArticleThe Democrats' media pals are breathless with reports of a growing recovery. Only political bigots could possibly dispute the trend. As readers know, I tend to take a very strong historical perspective. Unlike physics or chemistry economics cannot perform laboratory-like experiments. However, the discipline does have a tremendous amount of historical evidence on which to draw. We should consider these events as economic case studies.

To see why I take a very pessimistic view of the present situation and the GDP figures we need only look at the 1930s. In 1933 GDP started to swiftly rise. By 1937 it had increased by about 32 per cent, then there was a violent contraction. Expansion quickly resumed and by 1939 it had risen by more than 50 per cent over the 1933 level. However, unemployment stood at 19 per cent against the 1933 rate of 25 per cent. So the years 1933 to 1939 were marked by six years of 'recovery', one contractionary year, mass unemployment and capital consumption. (The per centage of metal working equipment more than 10 years old rose from 44 per cent in 1925 to 70 per cent in 1940.)

This is certainly not my idea of a genuine economic recovery. A real recovery would bring about increased capital accumulation. This is not happening today. Even if full employment was restored, unless the process of capital accumulation takes place real wage rates would have to fall.

Now the course that a classic recovery takes is very distinct. A point is reached where stocks fall to a minimum. The upturn is then marked by growth in the output of raw materials and capital goods, which does appear to be the case at present. This leads to an expansion in economic activity all the way down the capital structure to the final stage of production as the output of intermediate goods expands and the demand for labour rises. As the recovery gathers steam the demand for loans increases and bank deposits once again multiply, causing prices to eventually rise again. The process continues until once again the monetary brakes have to be applied.

Hoover/Roosevelt policies paralysed much of this process resulting in the longest and deepest depression in US history. Can it happen again? This is precisely what I fear Obama is doing. Without a doubt he has given the country the most anti-business administration in its history. He has absolutely no understanding of how the economy operates or how wealth is created. It wouldn't be so bad if it were not for his fantastic belief that the economy can be managed from the Oval Office.

Despite the creation of 124,000 net jobs in April the U6 unemployment rate rose to 17.1 per cent and the standard rate to 9.9 per cent, leaving 15.3 million Americans officially unemployed. There is absolutely no denying the fact that the current 'recovery' is experiencing the slowest growth in the demand for labour since the 1930s. The slowdown in productivity is being interpreted by the media as signalling an impending increase in the demand for labour. (Last year the media interpreted the surge in productivity as signalling a coming rise in the demand for labour. When it comes to Obama they never seem to run out of excuses.)

Now labour is hired because its services have value. When the cost of labour is forced above the value of those services unemployment emerges. If the labour market is still not clearing then this would normally suggest that the necessary economic adjustments have yet to be completed. The problem here is that the market is not free. I'm not talking about wage-fixing but Obama's impending avalanche of taxes (the Bush tax cuts automatically expire at the end of the year) and the coming regulatory flood. Then there is his insane policy for raising energy prices. It's my opinion -- and it is only an opinion -- that these facts have had a deep and detrimental influence on business expectations.

Small business is not only the country's biggest employer it is also responsible for 65 per cent of new jobs created and yet Obama plans to take a baseball bat to it. Every firm whose payroll exceeds 50 will either have to add health insurance to the cost of hiring each worker or pay an annual penalty (read levy) of $2,000 per worker. And as I understand it, part-time workers who put in 30 hours a week are not excluded. Obviously, the only way to avoid these additional labour costs or the penalty is not to hire more than 50 people. It's almost as if big businesses had conspired to make it even harder for smaller businesses to grow and compete with them.

Some people are arguing that this legislation will cause these smaller firms to substitute machinery for employees in order to avoid what is in effect a tax. This is a fallacy. Machinery has to be paid for out of savings. It equals forgone consumption. Therefore, even if some these firms do invest in more machinery it will be because they bid it -- in the absence of increased savings -- away from other firms. The result is a lowering of productivity because machinery is now being allocated to less productive activities.

Not only is Obama and his galere of economic illiterates hitting small business with a health tax he is also about to slug it with a bureaucratic nightmare. These firms will have to file Form 1099 for every payment in excess of $600 they makes to an independent contractor. On top of that, they will now be required to also file the same form with the IRS for all business transactions that exceed $600. Given the number of transactions that each business carries out during the year this will amount to hundreds of millions of forms each year. The man-hours and the quantity of paper needed will be astronomical.

Obama's regulatory zeal will have the effect of making the US economy increasingly sclerotic, slowly squeezing out of it the entrepreneurial spirit that once made it the economic envy of the world. But one should think of Obama's regulatory straitjacket as the anvil and his spending and borrowing programs as the hammer with America as the work in progress according to Obama's dream of a New America, one that has been transformed by his socialist vision.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Copyright © 2010 Gerard Jackson

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