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Democrats and Recessions

Politics / US Economy Jun 09, 2008 - 06:47 AM GMT

By: Gerard_Jackson

Politics Now that Obama is the Democrats' contender for the presidency, they can resume their attacks on the US economy. These moral cretins have still got the effrontery to assert that the Bush economy is one of the worst in the country's history when that appellation should be awarded to the Roosevelt administration. (The second worst would be the Hoover administration).

Seeing as the Democrats and their media monkeys insist on making negative comparisons between the Bush administration and their mythical achievements I think it necessary to try and focus on the truth. During the 2000 election Cheney and Bush were stridently attacked for pointing out that a recession was emerging. (Readers should try to understand that recessions are always a Republican phenomenon, even when the president is a Democrat).

Now to the nitty gritty. By February 2001 it should have been clear to all economic commentators that the US was in recession, Greenspan certainly thought so. Nevertheless, many commentators stubbornly refused to accept the economic reality. They admitted that unemployment had inched up from 4 per cent to 4.2 per cent and that this was probably not a good sign. What they could not understand is that the employment figures revealed nothing about the state of American labour markets.

The truth is that aggregate unemployment figures at the time were not helpful. What mattered at that stage was where the layoffs were taking place. As I stressed numerous times before, the beginning of any recession will first make itself in manufacturing, particularly at the higher stages of production. And this is precisely what was happening at the time*.

I stressed the fact that rising unemployment in manufacturing can be offset for a time by rising employment in industries located at or near the point of consumption. Moreover, the possibility that reduced working hours and labour hoarding may have blunted for a time the unemployment effects of a manufacturing contraction needed to be considered. Unfortunately the economic commentariat failed miserably to account for the upward trend in unemployment. It is not surprising, therefore, that they determined there was really nothing amiss, even as they confessed that manufacturing was in a hard-pressed state and that the "job cuts so far are heaviest in technology and manufacturing".

Their Panglossian approach was to strongly deny the emergence of a recession (we need to bear in mind that a Democrat administration was still in charge) because the economy was still enjoying full employment. But full employment cannot provide protection against recessions. A little historical research would have told these commentators that full employment frequently preceded recessions. For example, unemployment was 1.3 per cent in 1920. However, a financial crisis saw the figure leap to 11.3 per cent in 1921. Coming to 1929 we find that aggregate unemployment stood at 3.2 per cent while unemployment in manufacturing was rising.

Hoover's tragic error was to accept the fallacy that the massive layoffs that accompanied the onset of previous recessions deepened them by cutting consumer spending. This led to the dangerous conclusion that large-scale unemployment could be avoided by implementing an economic based on maintaining wage earners' purchasing power, a policy that Roosevelt and the Democrat Party fully endorsed. The Roosevelt administration greatly aggravated the situation with an avalanche of interventionist policies that kept the economy in depression until Imperial Japan and Nazi Germany restored full employment.

What the vast majority of economists at the time failed to see is that the layoffs were due to unsustainable investments (malinvestments) finally revealing themselves. The Austrian School argues that recession is actually a vital part of the adjustment process made necessary by the loose monetary policy that created the boom. Hence any attempt to freeze relative prices — particularly wage rates — will only serve to prolong recession, as happened in the 1930s.

It is true that personal savings might fall at the beginning of a recession. After all, there is no economic law that says they should not. But we should not forget the tendency of savings to rise during recessions as people become more cautious. This is something to be encouraged as it will help accelerate recovery, provided politicians do not meddle with the adjustment process. We should also note that during inflationary periods, especially ones marked by reckless speculation, the tendency is for personal savings to fall, in some cases they might even become negative. What all of this means is that economic pronouncements — they don't deserve to be called analytical — based on so-called historical trends have as much credibility as tea leaves.

In several articles written before the media declared the recession official I directed readers toward NAPM surveys. (National Association of Purchasing Management has since been renamed the Institute for Supply Management). The Arizona-based NAPM said its purchasing index had fallen to 41.2 in January 2001, its sixth consecutive month below 50. It was the same story elsewhere. Now according to the NAPM index the US went into recession in 2000. But in February 2001 the Democrats and their media toadies were still falsely declaring that Bush had inherited a boom. Of course, once the recession was official Clinton's recession became president Bush's incompetence.

Now the same Democrats and those political activists that call themselves journalists are telling Americans that a massive tax increase — the greatest in the country's history — is based on sound economic principles. These are the same economic illiterates that blather about "fiscal responsibility". Since when have massive increases in taxes and government spending been consider responsible fiscal behaviour? The fact that they refuse to accept fiscal limits on spending and taxation is evidence enough that for them power comes before the social and economic welfare of the United States.

On a final note, it appears that Republicans have yet to learn that big spending by Democrat administrations is always compassionate and necessary while the same spending by Republican administrations is always "irresponsible". This is one of the reasons why America's corrupt media are giving Obama a pass on spending and taxation policies that they would never tolerate if they came from a Republican candidate.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

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