Double Dip Recession: Reagan & Obama
Double Dip Recession: Reagan & Obama
Typical of great statesmen, Ronald Reagan took no credit for our nation’s recovery during his tenure. He was called “The Great Communicator” because he almost single-handedly restored the nation’s confidence. Indeed, what we’re experiencing now is, first and foremost, a crisis of confidence. “I wasn’t a great communicator,” Reagan said in his farewell address, “but I communicated great things, and they didn’t spring full bloom from my brow, they came from the heart of a great nation – from our experience, our wisdom, and our belief in the principles that have guided us for two centuries.”
He added, “There were two great triumphs … that I’m proudest of. One is the economic recovery, in which the people of America created – and filled – 19 million new jobs. The other is the recovery of our morale. America is respected again in the world and looked to for leadership.” Fast forward to today; one of the most basic strategies in a successful magic trick is the use of misdirection and diversion. A great magician amazes by doing the obviously impossible and the audience applauds, delighted to be fooled, misdirected to look left when the real action is on the right, and cannot explain the inexplicable.
Last week, Obama said that he’s worried that spending too much money to help revive the economy could undermine a fragile U.S. recovery and throw the economy into a double-dip recession. Isn’t this like a guy shooting his neighbor and then saying, “Hey, buddy, you’re bleeding.” Yeah, comments like that give me confidence in the quality of Ivy League education. In fact, “Double Dip”, is a perfect nickname for this dolt. Let me get this straight – Obama says that if he keeps doing what he’s been doing, bad things will happen? But he’s going to keep doing it anyway because he wants universal health care and cap and tax. Obama’s comments and his direction is as sturdy as pushing on a string.
First, what does double dip Recession Mean? When gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. The causes for a double-dip recession vary but often include a slowdown in the demand for goods and services because of layoffs and spending cutbacks from the previous downturn. A double-dip (or even triple-dip) is a worst-case scenario. Fear that the economy will move back into a deeper and longer recession makes recovery even more difficult.
Well, before we can have a double dip recession we’d need to have the upside first, don’t we? Look at it like an upside down bell curve or the letter ‘U’. Have we bottomed out and improved? Are we in a U shaped recession? Without bad government policies/stimulus, which has caused rising unemployment and weak corporate profitability, it would have been V shaped. We would be in a W-shaped recession if the stimulus had any nominal effect and it created brief GDP growth, fell back, and then rose again – thus a double-dip recession. Right now, let’s just call it an L-shaped downturn. When Bush was POTUS, Obama said we were in recession when the GDP was still growing and now that they’re in power, Obama is saying we are out of it even though quarterly GDP continues to shrink.
Obama is foreshadowing the fact that he wants to spend money to ‘boost’ the economy, but at the same time cover his butt in the event of creating too much red ink. Too late. To start, when the stimulus money disappears, the programs that have begun won’t be able to sustain themselves when the states affected don’t have the funds to continue these ludicrous plans. In ten short months, Obama had presided over the biggest spending binge in world history. The U.S. national deficit has risen to $1.4 trillion since Obama took office ($1,412,442,058,575) and the national debt is now $12 trillion according to the Treasury Department’s Bureau of the Public Debt. With our mounting national debt and budget deficits, it is reasonable to assume that near-term future interest rates on new and refinanced debt will double or triple. There is no indication that Obama’s Road to Damascus conversion from big spender to debt reducer is anything more then rhetoric tailored to the comfort-sounding, albeit, misleading sound bite of the day.
Housing prices have been propped up, banks and auto companies have been bailed out, regulations have been increased, anti-capitalist measures installed, debt covenants have been violated, unemployment insurance has been extended, money supply has grown exponentially. In addition, there’s the cap-and-trade bill, the healthcare bill, and a “czar” around every corner. In short, the problems that caused the great recession have been compounded. Real output must then necessarily decline. How can anyone logically assert that we are in the beginning of a recovery? Until small business recovers, this economy will not.
Unless lawmakers make big changes, the interest Americans will have to pay to keep the country running over the next decade will reach unheard-of levels. In Fiscal Year 2009 (FY09), the U. S. Government spent $383 Billion of your money on interest payments to the holders of the National Debt. In 2015 alone, the estimated interest due – $533 billion – is equal to a third of the federal income taxes expected to be paid that year. And, as more money goes to interest, creditors may become concerned that the country can’t pay down its principal and lawmakers will be less able to pay for other national spending priorities. Less debt means less pressure on interest rates; more debt means greater pressure on interest rates.
Your money is spent through Appropriations Bills passed by The U.S. Senate and signed by the President. The Government does not have any money, it takes your money from you and, borrows more, then spends it on the appropriated bills. The bailouts of 2008 and 2009 are purely deficit spending. Expect to see enormous deficits in the foreseeable future, leading to much more debt; and interest payments on that debt will soon surpass social spending and become the largest item in the federal budget. Basic economics says that the President and Democrat Congress are doing the exact opposite of what should be done to shorten a recession (such as cut taxes across the board – personal, corporate, and capital gains – and slash government spending). In fact, this administration will bankrupt our economy if this spending spree continues on course.
Despite Bush’s bank lending plan that was proposed to restore economic confidence, the Democrats had “Plan B,” and no sooner was Obama sworn-in to office than they implemented their $4 trillion “recovery plan,” none of which is recoverable because that greatest transfer of wealth in history has nothing to do with recovery and everything to do with the socialization of the U.S. economy, Obama’s ultimate agenda. Obama’s promise to “fundamentally transform the United States of America” is in sharp contrast to Reagan’s massive tax reductions, deregulation and anti-inflation monetary policies. Obama is a clear and present danger to the U.S. and its Constitution and the American people. The overreaching authoritative hand of the federal government doesn’t do anything well. It’s inefficient, slow, prone to fraud, and ineffective.
Effect on Business & Consumers
Frozen credit lines. High unemployment. Foreclosures. Contrary to what Team Obama says, the economy is still contracting. At the very least, the business community and investors are NOT jumping back into the economy with both feet; they are still watching to see what legislative and regulatory monstrosities come out of Washington. With unemployment soaring and tax receipts slumping, the deficit will continue to rise. And, forgotten in all this is the job killer of rising taxation. The Bush tax cuts are set to expire next year and everyone’s marginal tax-rate are set to go up 10%. This does not account for what Charlie Rangle will push through Ways and Means or the impact of the “tax” on energy because of cap and trade or the number of taxes hidden in the health care bill or the impact on small businesses that create 70% or more of the new jobs.
Do the math yourself. What the business owner keeps is dependent on what they have to generate in new business and its correlating profit margins – let alone having excess revenue to hire, particularly if the business-to-business market and consumer markets are soft and interest rates have to go up, which is almost inevitable. The Fed has artificially depressed short-term rates to this point, but they can’t keep it up forever. When those rates balloon upward, massive defaults will follow, which will have a rather nasty effect on currently inflated equity prices. And any increase in interest rates will increase the debt service payments on small business and individuals.
When interest rates rise, consumers, businesses and the economy are affected in several ways. Consumers are less likely to purchase products such as automobiles, mortgages and other consumer goods. Higher interest rates means consumers must pay higher finance charges. Two-thirds of economic activity is based on consumer spending and when consumers stop spending the economy slows. Many companies too need to borrow money and accumulate hefty debt loads if they want to continue to do business. When interest rates increase, the cost of borrowing money increases as well, this cuts into the profits of a company. A decrease in profits will cause the price of a company’s stock to decrease and rebuilding of inventories, one of the main drivers of the economy’s recovery, is hampered when business can’t borrow or its profits fall.
A lot of consumers have credit products too such as credit cards and mortgage loans that have variable rates. When interest rates increase, or resets kick in, a consumer’s monthly payments will increase in order to accommodate the higher amount of interest that needs to be paid monthly. If the payments on a mortgage increase substantially, many consumers will not be able to make the payments, leading to delinquency and foreclosure. Also, if consumers cannot make credit card payments, credit card companies will probably have to write-off a number of accounts as bad debts. In order to stop the losses, many credit card issuers will lower consumer credit card limits as well as the limits on home equity accounts. This will further curtail consumer’s ability to spend and throw the economy further into a downward spiral.
From a small business’s point of view, no material change would make one want to hire more staff or take any risk. The Democrats are simply too hostile to business. Credit markets have dried-up, more inflation on the horizon, the crippling energy costs, and consumers less disposable income – those still with jobs anyway – all are barriers to any recovery. Globalization and export of jobs have economic consequences too; The national help desk for Bright House Networks is in the Philippines, Honeywell has hired foreigners to build-out war machine, Verizon DSL help-desk is now in India, Taiwan, etc., Hewlett Packard support is located all over the world and Neilson Media fired 3,500 Americans in lieu of foreigners. Now Nestle’s Water plant has cut 40% of it’s work force and Danka has been sold-out to foreign interests as well.
Add that to the loss of farm produce in California to save the Delta Smelt, a minnow, and the possibility of staring food shortages in the eye and we have real consequences of a left-wing economy facing us. OPEC too is talking about moving away from the US dollar as the currency oil is traded in. The natural effect of monetizing debt is a devaluation of the dollar, double-digit inflation and a lower standard of living. We’re seeing our dollar decline in value, yet President Training Wheels continues to print more money. What incentives are there to invest? Obama and company want the economy to falter, even collapse, so that the government can takeover all major aspects of the American financial system. Obama is now the Pinball Wizard and we are seeing a Weekend at Bernie’s act as I type; he has stolen the thorny crown as possibly the worse president since Jimmy Carter.
Obama is planning to raise all corporate taxes too. The price of everything you buy will go up to cover that tax cost. So, you will be paying those corporate taxes. With higher taxes businesses have to either raise prices or cut cost. When the economy goes into a recession, businesses lay off workers because of the lack of demand for goods and services. To spur demand, businesses will sometimes lower prices which eat into their margins. Consumers will delay spending because they will wait to see how low the prices will go. Companies and organizations will lay off more workers because they will try to cut expenses in an effort to maintain profit margins.
An economy can enter a state of deflation too, which is a constant downward spiral of prices versus inflation where there is a sustained rise in prices. The inflation-deflation debate heated up too in 1981-82 during Reagan’s on-again, off-again recession. Deflation, to us, is too much debt chasing too little income. Inflation and deflation are two sides of the same coin and both are always with us to some varying degrees. During periods of inflation, capital moves away from job-creating and during periods of deflation businesses avoid borrowing to fund future growth, knowing full well that the money they’ll pay back over time will be more than what they borrowed.
As more consumers delay spending while waiting for prices to bottom out, the economy slows even more. There will be more layoffs and more price reductions and more foreclosures. And, some leading corporate executives worry there’s no economic engine available to drive growth in 2010: Technology, construction, finance – all sectors that have powered the U.S. economy out of the doldrums in the past – are flat this year. The commercial real estate sector too is poised for a crash of its own, further dragging down the prospects of recovery of the national economy. While Obama has turned to government to solve the problems of the people, Reagan turned to the people to solve the problems of government.
During his 1980 Labor Day speech at New Jersey’s Liberty State Park, Republican presidential nominee Ronald Reagan listed the economic failures of his opponent, President Jimmy Carter. With the Statue of Liberty as a backdrop, Reagan used the moment to respond to Carter, who had accused Reagan of misusing the term “depression” to describe a recession that began in January of that year. “Let it show on the record that when the American people cried out for economic help, Jimmy Carter took refuge behind a dictionary. Well, if it’s a definition he wants, I’ll give him one. A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his.”
However imprecise Reagan’s macroeconomic definitions may have been, he’d made his point. Semantics don’t mean much to Americans who have lost or are about to lose their jobs, their savings and their homes. Obama says the economy is the worst since the Great Depression. Actually, it is the worst since the Reagan recession of 1982-83. Further, the 2009 market crash is not the worst since 1929, but since 1987 — also on Ronald Reagan’s watch. What did Reagan do – or, more importantly, didn’t do – in response to these “crises?” versus from what Obama is doing?
In both cases, Reagan did the exact opposite of Mr. Obama’s massive government spending infusions. As for the Reagan recession, he waited extremely patiently – to the point where he drove his advisers nearly nuts – for his huge 1981 tax cuts to take effect. He didn’t spend money because he believed spending had been out-of-control, particularly since FDR’s New Deal and LBJ’s Great Society, which created systemic deficits. Reagan felt that high spending, high regulation, and high taxes had sapped the American economy of its vitality, and particularly its ability to rebound from recession. The economy needed to be freed in order to perform.
Reagan’s prescription rested on four pillars: tax cuts, deregulation, reductions in the rate of government spending, and a stable, carefully managed growth of the money supply. The federal income tax reduction was the centerpiece: Reagan secured a 25% across-the-board reduction over a three-year period, beginning in October 1981. The upper income marginal tax rate was dropped from 70 percent, which Reagan believed was punitive and stifling, to 28 percent. By 1983, America had begun its longest peacetime economic expansion in history, cruising right through the 1987 market plunge.
What did Reagan do about the October 1987 crash? Basically nothing; certainly nothing like a massive government stimulus. “Some people are talking of panic,” Reagan calmly confided to his diary. “Chrmn. of Stock Exchange is acting very upset.” Those are Reagan’s only diary references to the financial crisis. With the economy freed, he was confident it would bounce back. Reagan let the economy correct itself. The Cato Institute’s Richard Rahn wrote an excellent op-ed for the Washington Times, in which he evaluates the “worst recession since the Great Depression” meme and compares the situations inherited and actions by Presidents Reagan and Obama. I urge folks to give it a read, but here are the highlights:
Even though the president, many members of Congress and many journalists keep saying we are in the worst recession since the 1930s, it is an assertion that is premature, to say the least.
At the end of World War II, from 1945 to 1946, there was a very sharp drop in U.S. output (12.1 percent) as the war economy began its transition to a civilian economy. The deepest and longest-lasting recession the United States has experienced since then began in 1980, when Jimmy Carter was president (the gross domestic product dropped 9.6 percent in the second quarter of that year) and did not end until fourth-quarter 1982, almost two years into the Reagan presidency. There were positive quarters during this almost three-year period, resulting in what is known as a double-dip recession, but GDP did not return to the 1979 level until well into 2003. Unemployment peaked at 10.6 percent in the fall of 1982.
Both President Reagan and President Obama inherited an economy suffering from a year of no growth, along with rising unemployment. (The numbers are almost identical.) But Mr. Reagan faced a far direr situation in that inflation was in the double digits and the prime interest rate was at 20 percent. In contrast, Mr. Obama inherited an economy in which inflation was falling (in fact, inflation has been close to zero for this year) and interest rates were very low.
…The Misery Index dropped by more than 10 points during the Reagan presidency, the single largest improvement during any president’s tenure in the last half-century.
…President Obama has taken the polar opposite approach to President Reagan’s to reignite the economic-growth engine. Reagan pushed for cuts in marginal tax rates to encourage people to work, save and invest in an effort to spur the supply side of the economy as well as the demand side. Mr. Obama has chosen only to greatly increase government spending in an attempt to increase demand while, at the same time, many of his new labor, environmental, energy and other regulations are impeding the supply side of the economy.
Mr. Obama had the advantage of both houses of Congress being controlled by his party, so he was able to get his stimulus package passed within a few weeks of taking office. Reagan was handicapped by having the opposition party in control of the House of Representatives, whose members both delayed (until August 1981) and reduced his tax-reduction stimulus package.
In fact, the Reagan tax cuts were not fully phased in until 1983, more than two years after he assumed office. Reagan, hobbled by an opposition Congress, was not able to get the spending-growth restraint he wanted, so substantial budget deficits occurred early in his administration, at one point reaching 6 percent of GDP. In retrospect, the Reagan deficits look small compared to the deficit of 13.5 percent of GDP this year and the Obama administration and Congressional Budget Office projections of huge deficits in the years to come.
Once Reagan’s tax cuts were largely phased in, the economy took off – it grew by 7.6 percent in 1984 alone. We are in the midst of a most interesting experiment. The administration and the CBO forecast moderate and uninterrupted economic growth between the end of this year and 2019. If they are correct, 1980-82 – not the current recession – will remain the longest sustained period without economic growth since World War II. If they are wrong, they indeed will have the worst economic downturn since the Great Depression and no one to blame but themselves.
OK, but Reaganomics created huge deficits, right?
First off, know these crucial facts: The deficit under Ronald Reagan increased 35 percent, from an inherited deficit (from President Jimmy Carter) of $104 billion in 1980 to a final deficit of $141 billion in 1989. The deficit peaked at $236 billion in 1983, particularly because of the plummet in tax revenue during the recession. It began dropping steadily in 1986, continuing through the 1987 crash. (Source: Congressional Budget Office figures, “Historical Tables.”) Compare that to what’s happening now, where the direct opposite of Reaganomics is being pursued by the liberal Democratic president and congressional leadership;
President Obama inherited a record Bush deficit of $400 billion, but is generating a far worse $1.8-trillion deficit in his first year. (Source: Congressional Budget Office, March 20, 2009.) We’ve never seen anything like this. This unthinkable explosion is a direct result of the stunning government spending unleashed by Mr. Obama and the Democratic leadership in just eight weeks — an unheard of development in 233 years of American history.
So, think about this: Reagan increased the deficit by 35% in eight years, whereas Barack Obama has increased the deficit by 450% in only eight weeks. Reagan created an extra $37 billion in annual deficit. Mr. Obama has already created an extra $1.4 trillion in annual deficit. But what, exactly, caused the Reagan deficits? There were several factors: the recession of 1982-83, the Reagan defense spending – implemented to turn the screws on the Soviets – the domestic social spending by the Democratic Congress and more. Some reasons were Reagan’s fault; others were Congress’ doing – both share blame in differing degrees.
Importantly, and despite what you’ve heard, Reagan’s tax cuts didn’t create the deficit. Tax revenues actually boomed from roughly $600 billion in 1981 to $1 trillion in 1989. The primary cause of the deficit was recession and spending, mainly spending – as is always the case. It is especially the case right now under Obama, with the spending component utterly out-of-control. Wealth confiscation and redistribution by government central planners never works; unfortunately, it is that extremely destructive method that Americans elected in November 2008.
Many argue comparing the reaction of Obama and Reagan to their recessions as comparing apples to oranges. Reagan inherited an economy that consisted of double-digit inflation, double-digit interest rates and double digit unemployment. His reaction was to cut taxes and put the money back into the hands of the people who earned it. People began spending. Companies began hiring and the economy responded. Obama on the other hand is increasing spending and taxes at a historic rate never seen before.
Cap and trade to increase energy bills, government control of health care estimated at over $1 trillion which the Congressional Budget Office (CBO) has been sending out red flags. With first-time homebuyer tax credits and “cash for clunkers” car-selling schemes, government stimulus spending and bailouts, housing bust, credit crunch – all point to serious fiscal problems – and with Social Security on the verge of bankruptcy this recession will not end soon. This is why bills are being passed without being read and all of the Obama agenda has been put on fast track to keep the details from the public, with a huge assist by the state run media. Americans may well fall victim to their own lack of attentiveness.
The amounts of deficits the administration are running are unprecedented and unsustainable. More government spending, more government borrowing, more government money printing, more government tax increases. This is not a pro-growth formula which almost guarantees reduced tax revenues, which almost guarantees greater deficits, for every level of government. Credit is contracting. The banks may be getting billions in loans, but for the individual on the street, credit is frozen. Couple this with the loss of primary income streams and you have a lot of people with no money for even essential goods. Employers need to be convinced the economic recovery is here to stay.
And, we continue to lose jobs month-over-month too. And, while the statistics being released are showing a slow down, this is basically a fabrication. There are thousands of people falling off of unemployment compensation each week – none of them are reflected in the official numbers. Foreclosures continue to mount too. In addition to the foreclosures of the last 2-years, we have millions more in play right now, regardless of the mortgage programs the government institutes. Job loss plus credit contraction means there is no way millions of people will be able to make their monthly payments.
The best-case scenario is a “V”-shaped recovery – a sharp drop and a quick rebound – at some near-term point. Next best is a “U” shape, with a sharp drop, a protracted trough, and then a recovery. The worst of all possible scenarios is the “L”-shaped recession, which is a sharp drop followed by a flat line. In other words: No recovery at all. In previous recessions from the 1950’s through the early 1980’s, manufacturing led swifter recoveries. But the hiring that goes along with rebuilding industrial inventories these days just isn’t enough to move the needle in an economy less focused on making things (manufacturing). Consumer spending counts for much more economic activity today, but consumers are in no mood to go on spending sprees any time soon.
Playing politics will bad policy will lead to Obama’s underlying demise. Anybody who says the recession is over is either a liar or ill-informed and anybody who believes them is a moron. The natural effect of monetizing debt is a devaluation of the dollar, double-digit inflation and a lower standard of living. Obama’s economic policies will cause a redistribution of wealth, but instead of raising the standard of living for the poor it will decrease the standard of living for the wealthy with no effect on the poor, except the poor will become more dependent on government handouts as the government takes more and more of what wealth is created by the shrinking private sector. Obama will undoubtedly continue to ascribe blame for the recession to the Bush administration for as long as possible. The National Debt is now $12 Trillion.
And finally, as Reagan proved, the best “stimulus” is one that relies on letting free individuals and entrepreneurs stimulate the economy through their own earnings and economic activity and not government intrusion. Reagan implemented massive tax reductions, deregulation and anti-inflation monetary policies, which brought inflation down to 3.2 percent by 1983 and unleashed a historic period of economic growth. Of course, behind all the policy implementation was the most important element of the recovery: Ronald Reagan was a man of character and substance, as evidenced by his historic re-election in 1984; Obama lacks both.
Double dip? Gee, I hardly noticed the first one.
Note: Economists generally agree that annual deficits should not exceed 3% of the GDP, and that is the level Obama had vowed to reach by the end of his first term in 2013. However, factors such as subsequent spending, tax cuts and unexpectedly low revenues have pushed the forecast of Obama’s deficit to 4.6% of the GDP by then. Currently, the 2009 deficit is 10% of the GDP which is the highest level since the end of World War II when it was 21.5%. If you are wondering who holds the most US debt, here is a list compiled by CNBC.
15: Luxembourg – $104.2 Billion
14: Depository Institutions – $107.3 Billion (commercial banks, savings banks, credit unions)
13: Russia – $119.9 Billion
12: Insurance Companies – 126.4 Billion
11: Brazil – 139.8 Billion
10: Caribbean Banking Centers – 189.7 Billion
9: Oil Exporters – $191 Billion
8: United Kingdom – $214 Billion
7: Pension Funds – $465.4 Billion
6: State and local governments – $522.7 Billion
5: Other Investors – $629.7 Billion (“other” refers to individuals, government sponsored enterprises, brokers and dealers, bank personal trusts, estates, corporate and non-corporate businesses)
4: Japan – $711.8 Billion
3: China – $776.4 Billion
2: Mutual Funds – $769.1 Billion
1: Federal Reserve and Intergovernmental Holdings – 4.785 Trillion