Periodic Fiscal Insanity

Over the last couple of years, I've often pointed out that our economy has been doing much, much better than you realize. You probably mistakenly think that our economy has been something less than fabulous throughout the Bush years because you get your news from the media we have, not the media we wish we had. Reporters aren't trying to deliberately mislead you, but they don't know up from down when it comes to economic indicators, and they largely hail from the left. When you put those two things together and add in a despised (by them) president, you get a non-stop series of reports about the troubles facing the U.S. economy. My point has always been that, to figure out how the economy is doing, you have to look at the basic indicators (i.e., the ones that have always been used to gauge the health of the economy), and you have to look at those numbers over time (e.g., dating back 20 years) and over place (e.g., compared to the other major industrialized nations of the world). Anyone who has taken the time to do that knows that the American economy is simply fabulous. There is no getting around it no matter how painful you might find that truth to be.

Many have gotten the impression that my posts about the economy translate into strong support for Bush's economic policies. That's not true. Exposing the well-intentioned but misguided efforts by mainstream media reporters to convince you that George Bush has simply ruined the American economy (or tilted it in favor of the rich) is nothing more than an effort to reveal the truth -- based on concrete evidence that you can check for yourself -- about the condition of our economy (not to specifically support Bush's economic policies). The only exceptions to this are the Bush tax cuts of 2001 and 2003. At the time they were enacted, I wasn't sure that they were a good idea. In hindsight, it seems that they were (given how strong the economy has been since 2003 and how low the budget deficit was getting until the recent stimulus package was enacted).

In any case, my efforts to convince you that the American economic model is the way to go will be a bit more complicated now that the economy is heading into a period of slow-growth (and, perhaps, a recession -- but we'll see). However, I'd like to point out that our economy suffers periodic economic jolts that lead to recessions but that do not imply that there is anything structurally defective about our basic economic policies. Looking back to the 1980s, we had this:

Savings and Loan Crisis

The US Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."[1] The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government -- that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts-- [2], which contributed to the large budget deficits of the early 1990s....

A taxpayer-funded government bailout related to mortgages during the S&L crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher-risk loans during the 2007 subprime mortgage financial crisis. [4]

The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession. Between 1986 and 1991, the number of new homes constructed dropped from 1.8 million to 1 million, the lowest rate since World War II. [5]

Then, in the late 1990s, we had this:

Dot-com bubble

The "dot-com bubble" (or sometimes the "I.T. bubble") was a speculative bubble covering roughly 1995–2001 (with a climax on March 10th, 2000 with the NASDAQ peaking at 5132.52) during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. The period was marked by the founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms. A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line. The bursting of the dot-com bubble marked the beginning of a relatively mild yet rather lengthy early 2000s recession in the developed world.

Now, about a decade down the line, we have this lovely mess:

Subprime mortgage crisis

The subprime mortgage crisis was a sharp rise in home foreclosures which started in the United States in late 2006 and became a global financial crisis during 2007 and 2008.

The crisis began with the bursting of the housing bubble in the US[2][3] and high default rates on "subprime" and other adjustable rate mortgages (ARM) made to higher-risk borrowers with lower income or lesser credit history than "prime" borrowers. Loan incentives and a long-term trend of rising housing prices encouraged borrowers to assume mortgages, believing they would be able to refinance at more favorable terms later. However, once housing prices started to drop moderately in 2006-2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as ARM interest rates reset higher. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% versus 2006. [4] As of December 22, 2007, a leading business periodical estimated subprime defaults would reach a level between U.S. $200-300 billion. [5]

In each case, some irrational activity spiraled out of control, and a recession was needed to shake it off. I don't know if a recession awaits us now, but, one way or another, we are in the midst of shaking off the crazy loan deals that have been artificially propping up the housing market in recent years. As the economy slows, our well-intentioned but utterly clueless media will surely blame Bush and portray the American economy as being hopelessly compromised, so let me try to inoculate you from this with a small injection of relevant economic information. As I have noted many times, the basic indicator of economic health is GDP growth. In a recession, GDP actually shrinks (for at least two quarters if you want to get technical about it). The change in GDP tells you what the prevailing trend is, but GDP per capita tells you where the average American actually stands. Let's look at that figure since 1980 for the U.S. economy and for the major economies of Europe (with PPP corrections to adjust for differences in the cost of living across countries; data here):


Those red circles show recession years as defined here (though I think they are really slow-growth periods that included periods of actual economic contraction). The years 1980, 1982 and 1991 were all associated with a decreasing GDP for the entire year (i.e., those were genuine recession years). I don't think we'll see that for 2008, but only time will tell. But my point is that, back in 1980, per capita GDP in the U.S. was much like that of the major industrialized nations of Europe. Throughout the Reagan years, the Bush-I years, the Clinton years, and the Bush-II years, the American economy has been increasingly outpacing the economies of Europe. Periodic recessions that serve to shake out fiscal nonsense do not change that fact. That's my point today. The current recession (if we have one, that is) will not change that fact either. And this will remain true despite the hysteria that you will no doubt encounter in mainstream media reports about the dire economic conditions we face.

Look at this chart and then think about whose economic policies you support, those of the Republican (John McCain) or the Democrats (Obama and Clinton). Given the clearly sub-par performance of the (relatively) socialist, big-government economies of France, Italy and Germany, I would just like each candidate to explain how his or her policies are more like the economic policies that have served as very well since 1980 (and are now serving Great Britain pretty well) and less like those that have mired the other large economies of Europe in the depths of permanent economic mediocrity. Is that asking too much?