On this day last year, I posted two charts that I developed using the Minneapolis Federal Reserve Bank’s interactive website.

Those two charts showed that the current recovery was very weak compared to the boom of the early 1980s.

But perhaps that was an unfair comparison. Maybe the Reagan recovery started strong and then hit a wall. Or maybe the Obama recovery was the economic equivalent of a late bloomer.

So let’s look at the same charts, but add an extra year of data. Does it make a difference?

Meh… not so much.

Let’s start with the GDP data. The comparison is striking. Under Reagan’s policies, the economy skyrocketed.  Heck, the chart prepared by the Minneapolis Fed doesn’t even go high enough to show how well the economy performed during the 1980s.

Under Obama’s policies, by contrast, we’ve just barely gotten back to where we were when the recession began. Unlike past recessions, we haven’t enjoyed a strong bounce. And this means we haven’t recovered the output that was lost during the downturn.

This is a damning indictment of Obamanomics

Indeed, I made this point several months ago when analyzing some work by Nobel laureate Robert Lucas. And it’s been highlighted more recently by James Pethokoukis of the American Enterprise Institute and the news pages of the Wall Street Journal.

Unfortunately, the jobs chart is probably even more discouraging. As you can see, employment is still far below where it started.

This is in stark contrast to the jobs boom during the Reagan years.

So what does this mean? How do we measure the human cost of the foregone growth and jobs that haven’t been created?

Writing in today’s Wall Street Journal, former Senator Phil Gramm and budgetary expert Mike Solon compare the current recovery to the post-war average as well as to what happened under Reagan.

If in this “recovery” our economy had grown and generated jobs at the average rate achieved following the 10 previous postwar recessions, GDP per person would be $4,528 higher and 13.7 million more Americans would be working today. …President Ronald Reagan’s policies ignited a recovery so powerful that if it were being repeated today, real per capita GDP would be $5,694 higher than it is now—an extra $22,776 for a family of four. Some 16.9 million more Americans would have jobs.

By the way, the Gramm-Solon column also addresses the argument that this recovery is anemic because the downturn was caused by a financial crisis. That’s certainly a reasonable argument, but they point out that Reagan had to deal with the damage caused by high inflation, which certainly wreaked havoc with parts of the financial system. They also compare today’s weak recovery to the boom that followed the financial crisis of 1907.

But I want to make a different point. As I’ve written before, Obama is not responsible for the current downturn. Yes, he was a Senator and he was part of the bipartisan consensus for easy money, Fannie/Freddie subsidies, bailout-fueled moral hazard, and a playing field tilted in favor of debt, but his share of the blame wouldn’t even merit an asterisk.

My problem with Obama is that he hasn’t fixed any of the problems. Instead, he has kept in place all of the bad policies – and in some cases made them worse. Indeed, I challenge anyone to identify a meaningful difference between the economic policy of Obama and the economic policy of Bush.

• Bush increased government spending. Obama has been increasing government spending.
• Bush adopted Keynesian “stimulus” policies. Obama adopted Keynesian “stimulus” policies.
• Bush bailed out politically connected companies. Obama has been bailing out politically connected companies.
• Bush supported the Fed’s easy-money policy. Obama has been supporting the Fed’s easy-money policy.
• Bush created a new health care entitlement. Obama created a new health care entitlement.
• Bush imposed costly new regulations on the financial sector. Obama imposed costly new regulations on the financial sector.

I could continue, but you probably get the  point. On economic issues, the only real difference is that Bush cut taxes and Obama is in favor of higher taxes. Though even that difference is somewhat overblown since Obama’s tax policies – up to this point – haven’t had a big impact on the overall tax burden (though that could change if his plans for higher tax rates ever go into effect).

This is why I always tell people not to pay attention to party labels. Bigger government doesn’t work, regardless of whether a politician is a Republican or Democrat. The problem isn’t Obamanomics, it’s Bushobamanomics. But since that’s a bit awkward, let’s just call it statism.

One Year Later, Another Look at Obamanomics vs. Reaganomics is a post from Cato @ Liberty - Cato Institute Blog

Talking about royal weddings on NPR, Tina Brown says that there’s high unemployment in Britain, as there was in 1981, because of Conservative governments’ budget cuts (transcript edited to match broadcast):

Of course, the wedding of Prince Charles and Diana occurred three decades ago, but Brown points out that there are plenty of similarities between the two eras. “2.5 million are out of work right now with the budget slashes and all the economic austerity that’s happening in England,” Brown says. “There were actually the same amount of people exactly out of work at the time of Charles and Diana, when Mrs. Thatcher came in and began her draconian moves.”

I know that Tina Brown is a journalist, not an economist, but surely she’s heard of the recessions of 1979 and 2009, both of which may have helped to usher in a new government pledged to economic reform. It isn’t budget cuts that have increased British unemployment, it’s the recession. The unemployment rate started rising in early 2008 and kept right on rising during the world financial crisis, which featured not budget cuts but massive spending by governments around the world.

Tina Brown and the Economics of Recession is a post from Cato @ Liberty - Cato Institute Blog

The George W. Bush administration ushered in a new era of big government. The Obama administration has built on Bush’s profligacy, and the president’s new fiscal 2012 budget proposal would further cement the trend.

Spending as a percentage of GDP has increased dramatically since the surplus years of the late 1990s. As the chart shows, the president’s budget once again seeks a permanently high level of federal spending as a share of the economy:

While the numbers drop from their stimulus- and recession-induced highs, it is not because the president has suddenly decided that he desires a less active government. Rather, optimistic economic assumptions largely account for the slight retrenchment.

Tax increases and optimistic economic assumptions explain the projected rise in revenue as a share of the economy. While the president would like us to believe he’s found religion on spending cuts, he’s actually relying on a rosy economic forecast and sucking more money out of the private sector to reduce annual deficits.

Taking more money from the productive private economy to maintain destructively high levels of federal spending is not a recipe for economic growth. Therefore, this budget proposal is as dangerous as it is disingenuous. Fortunately, it’s also dead on arrival in the Republican-controlled House.

New Era of Big Government is a post from Cato @ Liberty - Cato Institute Blog

An article in today’s Boston Globe might help to debunk one of the more pervasive myths that distorts U.S. foreign policy: the belief that access to oil from the Middle East is a vital national security issue for the United States.

I discuss the issue in my book, The Power Problem (pp. 107-114). In addition, the Cato Institute and/or Cato scholars have published no fewer than five papers and articles over the past two decades documenting the many reasons why access to oil — or any other natural resource, for that matter — should not be cast as a national security threat. (See, e.g. here, here, here, here and here).

An article in the journal Security Studies expands on the last of these papers, published by Eugene Gholz, at the University of Texas, and Daryl Press, at Dartmouth College. (Justin Logan deserves credit for locating an early version of this paper, and working with Gholz and Press to publish the paper in Cato’s Policy Analysis series in 2007).

But the Gholz/Press plea that U.S. policy not fall victim to ”energy alarmism” isn’t particularly controversial. Or, at least, it shouldn’t be. Writes the Globe‘s Jeremy Kahn:

Gholz and Press are hardly the only researchers who have concluded that we are far too worried about oil shocks. The economy also faced a large increase in prices in the mid-2000s, largely as the result of surging demand from emerging markets, with no ill effects. “If you take any economics textbook written before 2000, it would talk about what a calamitous effect a doubling in oil prices would have,” said Philip Auerswald, an associate professor at George Mason University’s School of Public Policy who has written about oil shocks and their implications for US foreign policy. “Well, we had a price quadrupling from 2003 and 2007 and nothing bad happened.” (The recession of 2008-9 was triggered by factors unrelated to oil prices.)

And yet, the idea that is rejected by most economists is almost universally believed by politicians, and hyped by interest groups who stand to gain by stoking public fears. Auerswald explains: 

“This argument is like the familiar old jeans of American politics,” he said. “They are nice and cozy and comfortable and everyone can wear them. Because of ethanol, the farm lobby loves it; for coal, well it’s their core argument; for the offshore drilling folks, they love it.” Even the environmental movement relies on it, he said, because they use it as bogeyman to scare Americans into taking renewable energy and energy conservation more seriously. As for the US military, “The US Navy is not interested in hearing that one of their two main theaters of operation has no justification for being,” Auerswald said.

Here’s hoping that Jeremy Kahn’s article will help to set the record straight.

Debunking the Myth of Oil Dependence is a post from Cato @ Liberty - Cato Institute Blog

Ronald Reagan would have been 100 years old on February 6, so let’s celebrate his life by comparing the success of his pro-market policies with the failure of Barack Obama’s policies (which are basically a continuation of George W. Bush’s policies, so this is not a partisan jab).

The Federal Reserve Bank of Minneapolis has a fascinating (at least for economic geeks) interactive webpage that allows readers to compare economic downturns and recoveries, both on the basis of output and employment.

The results are remarkable. Reagan focused on reducing the burden of government and the economy responded. Obama (and Bush) tried the opposite approach, but spending, bailouts, and intervention have not worked. This first chart shows economic output.

The employment chart below provides an equally stark comparison. If anything, this second chart is even more damning since employment has not bounced back from the trough. But that shouldn’t be too surprising. Why create jobs when government is subsidizing unemployment and penalizing production? And we already know the so-called stimulus has been a flop.

None of this should be interpreted to mean Reagan is ready for sainthood. He made plenty of compromises during his eight years in office, and some of them were detours in the wrong direction. But the general direction was positive, which is why he’s the best President of my lifetime.*

*Though he may not be the best President of the 20th Century.

Comparing Reaganomics and Obamanomics is a post from Cato @ Liberty - Cato Institute Blog

An article in the Washington Post provides another example of how the Washington metro area has become virtually recession-proof:

The Washington region posted the highest year-over-year home price gains in the nation this fall, as real estate values slumped in nearly every other metropolitan area, a key housing report said Tuesday.

A healthy job market, particularly for high-salaried workers, buoyed demand and prices for housing in the D.C. area, local economists said. Home values climbed 3.7 percent in Washington in October from a year earlier, making it one of only four regions nationally to avoid a dip in prices, the Standard & Poor’s Case-Shiller home-price index said.

My colleagues David Boaz and Walter Olsen have highlighted numerous examples of how the Washington metro economy has prospered relative to the rest of the recession-battered country.

A map of Virginia’s unemployment rate by county produced by the Bureau of Labor Statistics is illustrative:

Unemployment rates for counties closest to the “Imperial City” are dramatically lower than the rates for those counties that are further removed. Arlington County unemployment is 3.8 percent, Alexandria City is 4.4 percent, and Fairfax County is 4.6 percent.

As David points out, the Washington region’s relative prosperity is a reflection of high pay for federal workers and “the boom in lobbying as government comes to claim and redistribute more of the wealth produced in all those other metropolitan areas.” Like an insatiable parasite, the Beltway class continues to gorge itself at the expense of the country’s productive class.

Taxpaying citizens should bear this in mind the next time they are tempted to look to Washington for “solutions” to the country’s problems.

A Happier New Year for the Beltway is a post from Cato @ Liberty - Cato Institute Blog

Journalists talk endlessly these days about the need for more consumer spending to revive the economy, and for government programs to juice consumer spending. Economist Steven Horwitz takes on the assumption that spending is the key to economic activity:

One of the most pernicious and widespread economic fallacies is the belief that consumption is the key to a healthy economy.  We hear this idea all the time in the popular press and casual conversation, particularly during economic downturns.  People say things like, “Well, if folks would just start buying things again, the economy would pick up” or “If we could only get more money in the hands of consumers, we’d get out of this recession.”  This belief in the power of consumption is also what has guided much of economic policy in the last couple of years, with its endless stream of stimulus packages.

This belief is an inheritance of misguided Keynesian thinking. Production, not consumption, is the source of wealth.  If we want a healthy economy, we need to create the conditions under which producers can get on with the process of creating wealth for others to consume, and under which households and firms can engage in thesaving necessary to finance that production….

Putting more resources in the hands of consumers through a government stimulus package fails precisely because the wealth so transferred ultimately has to come from producers.  This is obvious when the spending is financed by taxation, but it’s equally true for deficit spending and inflation.  With deficit spending the wealth comes from producers’ purchases of government bonds.  With inflation it comes proportionately from holders of dollars (obtained through acts of production) whose purchasing power is weakened by the excess supply of money.  In neither case does government create wealth. Nor does consumption.  The new ability to consume still originates in prior acts of production.  If we want real stimulus, we need to free up producers by creating a more hospitable environment for production and not penalize the saving that finances them.

The ‘Consumer Spending’ Myth is a post from Cato @ Liberty - Cato Institute Blog

From time to time my colleague David Boaz posts about the many ongoing ways in which the economy of Washington, D.C. continues to outpace that of the rest of the country, thanks to a well-paid and layoff-resistant workforce of federal employees and contractors, a thriving lobbying sector, and so forth. Thus David noted this week that the Washington, D.C. metro area has now attained the highest family median income of any major city, and last month that, according to Census Bureau figures analyzed by Newsweek, “seven of the 10 richest counties in America, including the top three, are in the Washington area.” I thought I’d add three more data points to this picture:

• Even as most of the country remains mired in serious housing recession, the capital has bounced back smartly: “The District claims the top ranking on the agency’s state-by-state list of annual price appreciation, with 5.29 percent growth since the third quarter of last year,” compared with a 3.2 percent decline nationally. Virginia and Maryland did less well, but most of both states’ population lives outside the D.C. orbit. [Washington Post]
• Commercial rents in downtown Washington have likewise defied the steep national slump, as the federal government expands its demand for office space: “The rise has been so dramatic that for the first time in five years, the average asking rent in D.C. is higher than in New York City, according to CoStar and a new report of third-quarter activity by commercial real estate firm Cassidy Turley…. ‘The federal government has created a smooth but slow rise in rents [in D.C.],’” noted one real estate economist. [Washington Post again]
• A business boom — in journalism? Even as veteran reporters elsewhere scrounge for work, talent and money continue to pour into Washington’s specialized news-gathering business, most particularly the sorts of newsletters that (for a subscription price in the thousands of dollars) will bring you fresh and fine-grained news of the doings of federal regulatory agencies in fields like energy, pharmaceuticals, securities and telecommunications. “[B]y dint of its regulatory powers, its executive orders, its judicial decisions, its ability to conjure money out of thin air, and its budget-making authority, Washington dictates who can do business and how,” writes Jack Shafer. “… Although $5,700 for a subscription to Bloomberg Government might sound steep to you, it’s chump change for businessmen who become the first in their cohort to read Line 125 in a pending bit of legislation and can place a bet on — or against — it in the market.” [Slate]

Rise of an Imperial City, Cont’d is a post from Cato @ Liberty - Cato Institute Blog

Forbes looks at new data on household income in different metro areas:

Median family incomes across the country decreased dramatically from 2008 to 2009, and no region was left untouched by the recession. But despite shrinking paychecks nearly across the board, some cities still stand out for their bigger-than-average salaries.

To find the places where Americans earn the most, we looked at median family income data for 2009, as reported by the U.S. Census Bureau. In September, as part of its annual American Community Survey, the Census released updated data for several hundred Metropolitan Statistical Areas — geographic entities defined by the U.S. government that roughly correspond to major cities.

The place with the highest median family income is the Washington, D.C., metro area, which includes the nation’s capital, as well as wealthy suburbs in Virginia and Maryland. In 2009 families in this region earned a median income of $102,340, a 0.7 percent increase from 2008. D.C. also boasts a better than average unemployment rate of 5.9 percent, far below the September’s 9.2 percent national average.

As we’ve reported here before, these trends began even before the Obama administration started concentrating job creation on the federal sector. In the middle of the Bush bubble, the Washington Post reported:

The three most prosperous large counties in the United States are in the Washington suburbs, according to census figures released yesterday, which show that the region has the second-highest income and the least poverty of any major metropolitan area in the country.

Rapidly growing Loudoun County has emerged as the wealthiest jurisdiction in the nation, with its households last year having a median income of more than $98,000. It is followed by Fairfax and Howard counties, with Montgomery County not far behind.

This of course reflects partly the high level of federal pay, as Chris Edwards and Tad DeHaven have been detailing. And it also reflects the boom in lobbying as government comes to claim and redistribute more of the wealth produced in all those other metropolitan areas.

To slightly amend a ditty I posted a few years ago,

Mamas, don’t let your babies grow up to be cowboys,

Don’t let ‘em make software and sell people trucks,

Make ‘em be bureaucrats and lobbyists and such.

No Recession in Washington is a post from Cato @ Liberty - Cato Institute Blog

The U.S. Postal service has announced a net loss of $8.5 billion for fiscal 2010. Since 2006, the USPS has lost $20 billion, and the organization is close to maxing out its $15 billion line of credit with the U.S. Treasury. Although the USPS has achieved some cost savings, they haven’t been enough to overcome a large drop in revenue due to the recession and the greater use of electronic alternatives by the public.

The USPS is required to make substantial annual payments to pre-fund retiree health care benefits. Last year, Congress allowed the USPS to postpone $4 billion of its fiscal 2009 into the future. However, Congress did not provide similar relief on this year’s required payment of $5.5 billion.

Critics of the retiree health care pre-funding requirement argue that no other federal agencies or private companies face such obligations. The argument is largely irrelevant for two reasons. First, the federal government’s financial practices are nothing to emulate. Second, very few private sector workers even receive retiree health care benefits.

In 2008, only 17 percent of private sector workers were employed at a business that offered health benefits to Medicare-eligible retirees, down from 28 percent in 1997. The actual number of private sector workers receiving these benefits is even lower as not all employees employed at the 17 percent of businesses that offers retiree health benefits are eligible to receive them.

The retiree health care benefit pre-funding requirement has become a rallying cry for the postal unions, as any threat to USPS solvency is a threat to the excessive compensation and benefits they’ve been able to extract from the postal service for their membership over the years.

Policymakers should properly view the retiree health care benefit as a symbol of postal labor excess, which continues to weigh the USPS down like an anchor. Therefore, they should avoid allowing the USPS to further postpone these payments into the future, which could lead to a taxpayer bailout. Instead, policymakers should recognize that the USPS’s financial woes require bolder action: privatization.

Postal Service Announces $8.5 Billion Loss is a post from Cato @ Liberty - Cato Institute Blog

GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves. 

I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.

But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:

[T]his exposure is in the single-digit billion range, and arguably potentially better.

I won’t argue with Rattner’s numbers.  After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.”  My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.

Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen.    Rattner touts what is seen, namely that GM and Chrysler still exist.  And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished.  (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring.  But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).

For what is seen, Rattner admirably admits of a cost.  And that cost is not insignificant.  It is anywhere from $65 billion to $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares—in the “single-digit billion range,” as Rattner says.  But Rattner is willing to stand by that trade-off, claiming his efforts and the billions in “government exposure” were a small price to pay for saving the U.S. auto industry, as it were.  It’s merely a difference in philosophy or compassion that animates bailout critics, according to this position.

No.  Not so fast.  All along (quite contemptuously in this op-ed, which I criticized here) Rattner has been unwilling to acknowledge the costs that are unseen.  Those unseen costs include:

• the added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring (whom might government favor or punish next?);
• the diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture!);
• excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM!);
• growing aversion to—and rising cost of—corporate debt (don’t forget what happened to Chrysler’s “preferred” bondholders in the bankruptcy process!);
• the sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;
• the fruitful R&D expenditures of those more disciplined companies;
• the expansion of job opportunities at those companies and their suppliers;
• productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;
• the diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.

 The list goes on.

 Yet, Rattner, seemingly oblivious to the fact that the economy remains stuck in the mire, speaks triumphantly of the successful auto bailout.  But nobody ever doubted that taxpayer resources in the hands of policymakers willing to push the bounds of legality could “rescue” GM from a fate it deserved.  The concern was that policymakers would do just that, leaving behind wreckage to our institutions not immediately discernible.  But anemic economic activity, 9.6 percent unemployment, and a private sector unwilling to invest is pretty darn discernible at this point.

Rattner should take off the tails, put down the champagne flute, and acknowledge what was originally unseen.

The GM ‘Turnaround’ in Bastiat’s View is a post from Cato @ Liberty - Cato Institute Blog

A new Wall Street Journal/NBC News poll would seem to say yes. In a story over the weekend under the headline, “Americans Sour on Trade,” the Journal reports:

more than half of those surveyed, 53%, said free-trade agreements have hurt the U.S. That is up from 46% three years ago and 32% in 1999.

One plausible explanation for the sour mood toward trade is the business cycle. 1999 was near the peak of the long boom of the 1990s, when Americans were feeling good about just about everything. Even three years ago, the stock market was at a record high and unemployment was below 5 percent. In this light, trade is another casualty of the lingering recession, not a cause as many trade critics want to argue.

“Outsourcing” was a major source of anxiety in the poll. Americans overwhelming believe outsourcing of production and manufacturing work to other countries is a reason why the economy is struggling and new jobs are not being created. This collective attitude is more reflective of the complaints people hear in the media than of any hard reality on the ground.

As I document in my 2009 Cato book, Mad about Trade, only about 3 percent of job displacement in the United States can be blamed on trade. (See pp. 31-33.) For every one person in the unemployment line because of imports or outsourcing, there are 30 people who have been  displaced from their jobs by technology, domestic competition, changing consumer tastes, or the general business cycle.

Despite the popular worries, outsourcing is more likely to attract business to the United States than send it overseas. Year after year, more direct manufacturing investment flows into the United States than out to other countries. Year after year, Americans sell more “business and professional services” to customers abroad than they buy.

The facts are on the side of expanding the freedom of Americans to trade and invest with people in other countries. What is lacking are political leaders in Washington who will stand up for the broader national interest of our country against the special interests who are exploiting anxiety about the economy to trash trade.

Have Americans Turned against Free Trade? is a post from Cato @ Liberty - Cato Institute Blog

The Government Accountability Office released Congressional testimony this week looking at Temporary Assistance for Needy Families. TANF, which replaced unrestricted welfare in 1996, has reduced welfare rolls and encouraged recipients to obtain work. Unfortunately, TANF’s goals have been undermined.

The GAO notes that “work participation rates … do not appear to be achieving the intended purpose of encouraging states to engage specified proportions of TANF adults in work activities.”

States are required to have at least 50 percent of eligible TANF recipients from single parent families participating in work activities. However, states are given various credits and exemptions that significantly reduce the number of recipients required to work. As a result, only about 30 percent of TANF recipients engage in “work activities,” which is often liberally defined. (This has been the case before and during the recession.)

Moreover, while TANF has successfully reduced the budgetary cost of cash-welfare, overall federal spending on anti-poverty programs has increased dramatically. According to a chart from Brian Riedl, anti-poverty spending has increased an inflation-adjusted 89 percent over the present decade:

I previously discussed how TANF enrollment has dropped since its passage in 1996 while food stamp enrollment has greatly increased. A food stamp user interviewed by the New York Times indicates one reason for the trend:

‘It used to be easier to go on cash assistance,’ she said as she left a food stamp office in Brooklyn this month. ‘You didn’t have to go to work, you didn’t have to report every day to an office and sign in and sign out. Now, if you don’t go to those group job meetings in the mornings, they shut down your whole welfare case. So that’s why I just get food stamps.’

Not surprisingly, the cost of the food stamps program has gone through the roof:

The desirability of federal anti-poverty programs in the midst of difficult economic times is a sensitive topic. However, with so many Americans currently in need of assistance, now is actually a good time to discuss the role of government in taking care of the less fortunate. As a Cato essay on welfare and Temporary Assistance for Needy Families argues, the federal government isn’t the best option.

Rising Welfare Costs is a post from Cato @ Liberty - Cato Institute Blog

As an economist I am the first to admit that sometimes the methods and practices of economics can end up creating confusion rather than understanding.  The National Bureau of Economic Research’s (NBER) recent announcement that the recession ended in June 2009 is one such example.

At the heart of this confusion is a difference in how the public sees a recession and how NBER defines it.  Most importantly, NBER views recessions as contractions.   Simply, “Is the economy growing or not?”  NBER uses that framework to then date business cycles from their peak to their trough.  For this reason, NBER will often date the beginning of a recession during a time when the economy feels strong (at its peak) and date the end of a recession when it feels weak (when it’s at the bottom).

Since this method seems at odds with how the public views the economy, why do economists use it?  Quite simply, it is a lot easier to spot, and agree on, turning points in the economy than it is to agree on when growth moves from weak to moderate to strong.

OK, enough on definitions.  Did we actually hit bottom in Summer 2009?  Looking at a variety of economic measures, I think it’s clear we hit bottom earlier–more like Spring 2009.  Again, I must emphasize: Hitting bottom is not the same thing as “everything is fine” – just ask anyone who’s personally hit bottom.  Just two examples of why I believe the contraction ended in early 2009; first: consumption, as one can see from the chart, actually hit bottom hear the end of 2008.

One of the defining characteristics of the current recession has been continued weakness in the labor market.  I would go as far as to say there has almost been a disconnect of the labor market from the general economy.  All that said, looking at the trend in layoffs and discharges indicates that separations from the labor force peaked near the end of 2008.  The graph below also illustrates why some are worried about a double-dip, as layoffs spiked again in the middle of 2010, although most of that is driven by the 2010 Census hires.

The point to all this is not to argue that the economy isn’t weak.  It obviously still is.  However, the economy has been growing, for at least a year, and under many measures, longer.  Interestingly enough, most measures of the economy hit bottom before a dime of stimulus money was spent.  The above charts are from the Federal Reserve of St. Louis FRED website.  Don’t take my word on these two charts.  Look at lots of other measures.  Not all, but most other measures seem to tell the same story.

Recession Over? is a post from Cato @ Liberty - Cato Institute Blog

Dana Milbank of the Washington Post wrote this weekend that critics of Keynesianism are somewhat akin to those who believe the earth is flat. He specifically cites the presumably malignant influence of the Cato Institute.

Keynes was right, and in this case it’s probably for the better: Keynes didn’t live to see the Republicans of 2010 portray him as some sort of Marxist revolutionary. …These men get their economic firepower from conservative think tanks such as the Cato Institute… What’s with the hate for Maynard? Perhaps these Republicans don’t realize that some of their tax-cut proposals are as “Keynesian” as Obama’s program. There’s a fierce dispute about how best to respond to the economic crisis — Tax cuts? Deficit spending? Monetary intervention? — but the argument is largely premised on the Keynesian view that government should somehow boost demand in a recession. …With so much of Keynesian theory universally embraced, Republican denunciation of him has a flat-earth feel to it. …There is an alternative to such “Keynesian experiments,” however. The government could do nothing, and let the human misery continue. By rejecting the “Keynesian playbook,” this is what Republicans are really proposing.

Milbank makes some good points, particularly when noting the hypocrisy of Republicans. Bush’s 2001 tax cuts were largely Keynesian in their design, which is one of the reasons why the economy was sluggish until the supply-side tax cuts were implemented in 2003. Bush pushed through another Keynesian package in 2008, and many GOPers on Capitol Hill often erroneously use Keynesian logic even when talking about good policies such as lower marginal tax rates.

But the thrust of Milbank’s column is wrong. He is wrong in claiming that Keynesian economics works, and he is wrong is claming that it is the only option. Regarding the first point, there is no successful example of Keynesian economics. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Japan in the 1990s. It didn’t work for Bush in 2001 or 2008, and it didn’t work for Obama. The reason, as explained in this video, is that Keynesian economics seeks to transform saving into consumption. But a recession or depression exists when national income is falling. Shifting how some of that income is used does not solve the problem.

This is why free market policies are the best response to an economic downturn. Lower marginal tax rates. Reductions in the burden of government spending. Eliminating needless regulations and red tape. Getting rid of trade barriers. These are the policies that work when the economy is weak. But they’re also desirable policies when the economy is strong. In other words, there is no magic formula for dealing with a downturn. But there are policies that improve the economy’s performance, regardless of short-term economic conditions. Equally important, supporters of economic liberalization also point out that misguided government policies (especially bad monetary policy by the Federal Reserve) almost always are responsible for downturns. And wouldn’t it be better to adopt reforms that prevent downturns rather than engage in futile stimulus schemes once downturns begin?

None of this means that Keynes was a bad economist. Indeed, it’s very important to draw a distinction between Keynes, who was wrong on a couple of things, and today’s Keynesians, who are wrong about almost everything. Keynes, for instance, was an early proponent of the Laffer Curve, writing that, “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”

Keynes also seemed to understand the importance of limiting the size of government. He wrote that, “25 percent taxation is about the limit of what is easily borne.” It’s not clear whether he was referring to marginal tax rates or the tax burden as a share of economic output, but in either case it obviously implies an upper limit to the size of government (especially since he did not believe in permanent deficits).

If modern Keynesians had the same insights, government policy today would not be nearly as destructive.

Keynes Was Wrong on Stimulus, but the Keynesians Are Wrong on Just about Everything is a post from Cato @ Liberty - Cato Institute Blog

In the 2006 and 2008 election cycles, Republican candidates for Congress tried to save their bacon by running against immigration. In 2010, according to the Wall Street Journal this morning, a number of Democrats are trying to save their seats by running against trade. I predict the Democratic tactic will be as fruitless as the Republican effort before it.

Democratic incumbents have been running TV ads accusing their Republican challengers of favoring trade agreements, outsourcing, and tax breaks for U.S. companies that invest abroad. The charges are wrong on substance, as I address at length in my 2009 Cato book Mad about Trade: Why Main Street America Should Embrace Globalization, but running against trade has not proven to be a vote getter, either.

It is difficult to find a presidential or congressional election anywhere that has turned on trade. While most voters have an opinion on trade, the issue tends to rank down the list of top concerns, far behind the economy, jobs, and, in this election cycle, government spending and debt.

Demonizing trade is an especially odd campaign tactic in 2010. The recession of 2008-09 was not caused by trade, but by the bursting of the housing bubble. As the economy slowly recovers, trade has been one of the bright spots, with a healthy increase in exports fueling a revival of the closely watched manufacturing sector, as my Cato colleague Dan Ikenson blogged a few days ago.

Democrats running against trade should remember that the “Clinton economy” of the 1990s that they often speak nostalgically of restoring was built in significant part on the passage of major trade agreements and a robust expansion of trade.

Democrats Turn on Trade in Desperation is a post from Cato @ Liberty - Cato Institute Blog

A Debate Between John F. Kennedy and Barack Obama is a post from Cato @ Liberty - Cato Institute Blog

“US manufacturing grows for 13th straight month” is the headline of an AP newswire story posted around noon today.  This statistic doesn’t surprise me, since I’ve been following developments in U.S. manufacturing for many years now, and have published analyses of public data that refute the myth of deindustrialization and manufacturing decline. 

With the exception of the recession of 08-09, when all U.S. economic sectors took a hit, U.S. manufacturing has been breaking its own record, year after year, with respect to output, value-added, profits, returns on investment, exports, and imports. U.S. factories are the world’s most prolific, accounting for 21.4% of global manufacturing value added in 2008 (China accounted for 13.4%).

But I bring the AP headline to your attention for one reason: so that you can judge for yourself who has any credibility on Capitol Hill, within the executive branch, in the media, among organized labor, in industry, in the think tank world, and within the international trade bar, as Nancy Pelosi tries to stuff a ruinous anti-China trade bill down our throats in the name of supporting our floundering manufacturing base.  Look for the columns, the op-eds, the press releases, and the floor statements between next week and November.

Who among them will continue to cite our suffering manufacturing sector as the justification for protectionism?  They should never again have any credibility.

The Rumors of Manufacturing’s Death Have Been Greatly Exaggerated is a post from Cato @ Liberty - Cato Institute Blog

A couple of weeks ago, David Boaz discussed the Old Testament story in which the people of Israel ask Samuel for a king to rule over them. God’s instructions to Samuel can be summed up as “tell them to be careful of what you wish for.” David brought up the passage in the context of civil liberties, but the story’s lesson also applies to economic liberties.

Over the past eighty years, the public has become conditioned in times of crisis to turn to their rulers and demand that they “do something.” That the rulers had a hand in the crisis is all too often either unrecognized or it’s a secondary concern. As Robert Higgs demonstrated in his seminal book, Crisis and Leviathan, the rulers will willingly oblige the public and, in the process, come away with more power and control than they had prior to the crisis. Unfortunately, the rulers’ enhanced authority begets more crises in the future.

The latest chapter in this story is the economic downturn. Many of the “seeds” for the recession were planted by government. Regardless, the average citizen reflexively looked toward Washington to quickly fix the economy. The public’s limited patience meshes well with policymakers who are naturally inclined to operate on a short-term horizon (i.e., the next election). Therefore, policymakers responded with quick-fix measures with almost no regard to the long-term consequences.

The long-term economic problems caused by massive deficit spending and mounting debt are the most obvious. But as two stories in the news show, short-term measures implemented by policymakers to “fix” the economy have also introduced unwelcome economic distortions.

First, following the expiration of the federal homebuyer tax credit, home sales have fallen off the cliff. The Christian Science Monitor asks: was the homebuyer tax credit the “scam of the century?” The program was riddled with fraud, some folks who were induced to purchase a house are already underwater or are headed in that direction, and the billions of dollars spent on the program did zilch for the long-term health of the housing market.

When one looks at ultimate beneficiaries of the tax credit, it’s easy to see why the CSM calls it a “scam:”

[I]n trying to fully understand why the government undertook such a useless and poorly calculated program, it’s important to recognize those who truly walk away from this policy in better standing.

Realtors, home builders and mortgage bankers… some of the most notable culprits of the housing bubble years… all walk away cleanly skimming the proceeds coming from the transactions of an estimated 2 million temporarily stimulated home purchases.

It should come as no surprise that these were the very same industry groups that worked tirelessly lobbying to enact this failed policy… it was a simple exchange… your tax dollars to their wallets.

Second, we go from “scam of the century” to the “the dumbest program ever.” The latter refers to the “Cash for Clunkers” program, which Chris Edwards submitted for nomination in August 2009. Chris cited numerous problems with the program, including that “Low-income families, who tend to buy used cars, were harmed because the clunkers program will push up used car prices.”

A senior editor at Edmunds.com tells a reporter from WIOD news radio in Miami that used-car prices are way up (h/t Radley Balko):

If buying a used car is among your cost-cutting measures… be prepared to pay up to 30-percent more than you did last year.

It is a simple case of supply and demand.

Trouble is … there are fewer used cars.

The cash-for-clunkers program took a bunch off the market.

Plus, Edmunds Senior Editor Bill Visnick says 5-million fewer new cars were sold last year…which pares down the used car supply even more.

As Radley sarcastically notes, you can’t blame those supposedly selfish limited government types for this one:

[W]e have a government program whose stated aim was to shore up huge, failed corporations by giving public money to mostly upper-income people that in the end will penalize low and middle-income people. But remember folks, it’s the libertarians—who opposed C4C—who are greedy corporatists who hate the poor.

There could be a silver lining in the cloud if more Americans start to realize that asking policymakers to quickly fix problems that government policies helped foster isn’t much different than asking the arsonist to put out the fire.

Government’s Unwelcome Economic Distortions is a post from Cato @ Liberty - Cato Institute Blog

If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable criticism. Now it’s time to address Derek Thompson’s critique on the Atlantic‘s site.

At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about Policy A causing Result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government — I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc. Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.

The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, and we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of regret is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week  and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).

But a blog post is no fun if you just indicate where you and a critic have common ground, so let me identify four disagreements that I have with Thompson’s post:

(1) To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true.

When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981, since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982.

In 1983, by contrast, it’s fairly safe to say the next stage of tax rate reductions was substantially larger than any concomitant tax increases. That doesn’t mean, of course, that one should attribute all changes in growth to what’s happening to the tax code. But it does suggest that it is a bit misleading to talk about tax cuts in 1981 and tax increases in 1983.

One final point: The main insight of supply-side economics is that changes in the overall tax burden are not as important as changes in the tax structure. As such, it’s also important to look at which taxes were going up and which ones were decreasing. This is why Reagan’s 1981 tax plan compares so favorably with Bush’s 2001 tax plan (which was filled with tax credits and other policies that had little or no impact on incentives for productive behavior).

(2) In addition to wondering whether one could argue that higher taxes triggered the Reagan boom, Thompson also speculates whether it might be possible to blame the tax cuts in Obama’s stimulus for the economy’s subsequent sub-par performance. There are two problems with that hypothesis. First, a substantial share of the tax cuts in the so-called stimulus were actually new spending being laundered through the tax code (see footnote 3 of this Joint Committee on Taxation publication). To the extent that the provisions represented real tax relief, they were much more akin to Bush’s non–supply side 2001 tax cuts and a far cry from the marginal tax-rate reductions enacted in 1981 and 2003. And since even big tax cuts have little or no impact on the economy if incentives to engage in productive behavior are unaffected, there is no reason to blame (or credit) Obama’s tax provisions for anything.

(3) Why doesn’t anyone care that the Federal Reserve almost always is responsible for serious recessions? This isn’t a critique of Thompson’s post since he doesn’t address monetary policy from this angle, but if we go down the list of serious economic hiccups in recent history (1974-75, 1980-82, and 2008-09), bad monetary policy inevitably is a major cause. In short, the Fed periodically engages in easy-money policy. This causes malinvestment and/or inflation, and a recession seems to be an unavoidable consequence. Yet the Fed seems to dodge any serious blame. At some point, one hopes that policy makers (especially Fed governors) will learn that easy-money policies such as artificially low interest rates are not a smart approach.

(4) Thompson writes, “Is Mitchell really saying that $140 billion on Medicaid, firefighters, teachers, and infrastructure projects are costing the economy five percentage points of economic growth?” No, I’m not saying that and didn’t say that, but I have been saying for quite some time that taking money out of the economy’s left pocket and putting it in the economy’s right pockets doesn’t magically increase prosperity. And to the extent money is borrowed from private capital markets and diverted to inefficient and counter-productive programs, the net impact on the economy is negative. Thompson also writes that, “Our unemployment picture is a little more complicated than ‘Oh my god, Obama is killing jobs by taking over the states’ Medicaid burden!’” Since I’m not aware of anybody who’s made that argument, I’m not sure how to respond. That being said, jobs will be killed by having Washington take over state Medicaid budgets. Such a move would lead to a net increase in the burden of government spending, and that additional spending would divert resources from the productive sector of the economy.

The moral of the story, though, is to let Richard Rahn publicize his own work.

When Keynesians Attack is a post from Cato @ Liberty - Cato Institute Blog