Battle4Liberty

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.