The State of the Economy

With only 16 days until the election, President Obama and many in the mainstream media are making the case that while challenges remain, the US economy is headed the right direction. The Dow has risen over 60% since Obama took office, unemployment has declined back to 7.8%, interest rates are low, and inflation seems to be in check. Could there be some merit to this argument? Examine the big three indicators–GDP, unemployment, and inflation–and you find no room for optimism.

1. Gross Domestic Product is anemic. GDP is projected to increase this year at a rate below that in 2011, which was lower than in 2010. While GDP isn’t a perfect representation of economic vitality, declining growth rates is a clear sign that the economy is stagnant.

2. Unemployment is worse than 7.8%. Official unemployment figures do not include frustrated jobseekers and count part-time workers who would like to work full-time as employed. Factor these into the equation and you get a true unemployment rate close to 15%.

3. Inflation will be a serious problem in the near future. The CPI (for technical reasons) understates the extent to which prices have been rising in the last few years, but the real threat is around the corner. The Fed’s rapid expansion of the money supply through quantitative easing has set the state for a serious middle term problem with inflation. As Milton Friedman put it, “inflation is always and everywhere a monetary phenomenon.” Put another way, expanding the money supply always devalues the currency, and currency devaluations can always be traced to expansions in the money supply. While the lag time can vary from months to years, the direct link between the quantity of money and price inflation is a nonnegotiable law of economics. Hence, the Fed’s failed intervention designed to stimulate the economy in the short term will be financed by the most insidious of all indirect taxes, a weaker dollar.

As we can see, the verdict for the last four years is not good. Unfortunately, prospects for the next four years are mixed at best. First the good news…GDP and unemployment can be addressed with proper economic policy. A simpler, less intrusive, and more predictable regulatory structure, and a flat tax–or even a two-tiered system with a very limited number of deductions–can remove many of the governmental influences that stymie individual and business decision-makers. Corporate America is sitting on an estimated $2 trillion in cash and real expansion and hiring will occur if Obama’s anti-business bias is replaced with a pro-business outlook.

But now the bad news…When business investment picks up, the economy will begin to feel the inflationary effects of several founds of QE activity. The seeds for long term damage have already been sown, and it will be difficult if not impossible for either candidate to sidestep this reality. If Obama inherited the Bush recession, then Romney would inherit Obama deficits and Bernanke inflation.

If elected, Romney could take the first step in turning the economy around. But while a departure from Obamanomics would be a welcome change, we shouldn’t expect too much too soon. The kind of economic overhaul necessary will require a complete change of perspective on the role of government in a free society. The occupant in the White House would be a good place to start, but the job won’t end there.

5 thoughts on “The State of the Economy

  1. Hey, you forgot to mention that Obama inherited this entire mess from Bush and the Republicans have been blocking progress ever since. He did the best any president could have done in four years. We need to complete the job now.

  2. Hey bereal, you’re not questioning the analysis, only who’s responsible. Why do we have elections every four years if that’s not enough time to fix anything?

  3. It is true than Bush was President during the subprime collapse. But we ought to mention other players of note. Glass – Stegall was repealed under Clinton, opening the door for banks to participate in investing in these mortgages. Barney Frank and Chris Dodd “encouraged” Fannie and Freddie to relax lending requirements. Greenspan pressured the Fed to reduce capital requirements for banks. Attorney Barack Obama successfully sued CitiBank forcing them to make loans in depressed communities in Chicago, most of which went into default. And lastly, the borrower, who made commitments they could not keep.

  4. WSJ headline from yesterday reads: Economy grows at 2% pace. Consumers, government spending powered third quarter gains.

    A slight chance for optimism?

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