Newsweek says, “The Great Recession is over“.
Don’t you believe it.
Just last month, the national news magazine’s cover announced this good news to the world with the caveat, “good luck surviving the recovery”. I would like this to be true, but history tells me otherwise.
I hate to throw cold water on their optimism, but it is way too premature and irresponsible journalism to make that claim at this time. This article noted that the stock market has rallied 44% since March, but acknowledged that things might not be so great for the average person. The U.S. Economy might have to cope with an era of lower expectations.
We have been in this recession for just a little over a year. The job losses are less than they were earlier in 2009, but we are still bleeding hundreds of thousands of jobs every month.
We have had a poor economy before, and we always have recovered. What has worked in the past?
President Obama is planning on raising taxes on the wealthy to help reduce the deficit. He and congress have authorized billions to jumpstart the economy. All the while, unemployment continues to climb. In the 80’s Reagan cut taxes while increasing spending. Unemployment reached a peak of 10.8% in 1982, but by 1984, it was down to 7.3%. Private investment was 238 billion when the recession started in 1980, reached a low point of 178 billion in 1982, but by 1984 was 300 billion. Much of this due to the fact that many Americans had more money to spend as their tax burden shrank.
Obama has put through a small tax break, (I think my share is about 8 bucks a week) but this is small compared to the 1980’s changes.
Before 1981, the top tax rate was 70%, and the entire Federal government took in about 517 billion. Just 10 years later, with lower tax rates, the Treasury took in 1.03 Trillion.
Lower tax rates meant more money into the Treasury, not less. Deficits also increased during that time, which was one of the factors that contributed to the stock market crash in 1987. But we soon got it back, and the Dow Jones average made it back to pre-crash levels within 2 years.
When the government spends money they don’t have, they have to get it one of three ways.
1) Borrowing: When the government is borrowing lots of money that is going to dry up the credit markets. We are already at record low interest rates, so we can’t look for help from the Federal Reserve to help in this area. There is less money available for citizens and businesses. Not to mention that other nations such as China are going to own a huge part of our debt.
2) Printing: We could always print more money, but that is going to lead to inflation.
3) Raise taxes to pay for it: This is probably the most inefficient way to get more money into the treasury, because when the government spends money, bureaucracy and red tape come along for the ride. One only has to look at the paperwork nightmare that auto dealers have had to endure with the “cash for clunkers” program. All of these forms have to be processed, and that is money that is lost, and the only thing stimulated is the growth of the federal government.
Many have compared our current economy to the Great Depression, set off when the stock market crashed in October 1929.
From November 1929 to mid 1930, the Market shot up 48%.
In addition, there were 6 more rallies of 20% or more during the years that followed, as the market continued to free fall. It bottomed out in 1932, but did not reach pre-1929 levels until 1955.
FDR’s solution to the depression was massive federal spending, and increased taxes to pay for the New Deal programs. The top rate rose from 25% to 63 %. In 1933, unemployment was close to 25%, and 5 years later, was still over 18%, even with all of the public works projects that were supposed to get people working. In 1941, joblessness finally was under 10%. If we use 1929-1930 is an indicator, we could be two years away from the bottom of our current downturn.
Massive Federal spending and hiking taxes on the rich did not help us in 1930’s, and Americans should not hold our breath and expect the current leadership in Washington to help us now.
Historical data tells us we may be looking at a recovery that is decades away, not months.
“The Great Recession is over.” I don’t think the recession is over at all.
At least that is what things look like to me. I sure hope that I am wrong.