Returning to the news media after a spell of attending to family matters, I see that the recession is over. Huzzah! It wouldn’t be over, I realize, if a Republican were President. The empirical proof of that assertion is that, on the eve of the 1992 election, the economy had expanded for five consecutive quarters, the last three at rates above four percent – yet Bill Clinton could assert without fear of MSM contradiction that the country was mired in the worst recession in 60 years.
It is, nonetheless, refreshing to see that the advent of Barack Obama has improved economic reporting. The media are suddenly attentive to GDP growth and aware that employment is a lagging indicator. Let’s hope that they’ll remember that when President Romney or Daniels or Pawlenty or McDonnell is digging his way out of whatever blend of stagflation President Obama leaves behind.
The third quarter’s 3.5 percent growth rate made Wall Street happy for a day. Then investors looked at the numbers more closely, and the market lost all of its gains and more. There’s no doubt about the expansion, but, after stripping out the temporary effects of home buyer credits and auto rebates, the rebound is anemic. Ominously, consumer spending declined in September, after the expiration of the props to housing and automotive purchases. The implication is that the third quarter looked better than it really was, because it borrowed activity from the future. Genuine growth apparently was in the one to 1.5 percent range.
Given the sharpness of the contraction, the recovery ought to have begun more robustly. Furthermore, even if it were impressive, its continuation would face an enormous obstacle: At some point, the Federal Reserve Board must either drain the unprecedented liquidity that it created fight the financial panic, or it must allow inflation to run amok. The former will put a damper on the economy, perhaps provoking a new recession. That’s what happened in 1981 and 1982, as Ronald Reagan and Paul Volcker labored to take the “flation” out of Nixon-Ford-Carter stagflation. The alternative is much worse. Barack Obama knows little history, but surely someone will at some point introduce him to the Weimar Republic.
President Reagan’s corrective for the effects of a planned deflation was freeing the economy: lower taxes, less regulation, fewer barriers to trade. President Obama has made clear his determination to go in the opposite direction. Except among those who believe that the Reagan boom was completely detached from the Reagan Administration’s policies – just a lucky coincidence, as it were – it’s hard to imagine that opposite actions will produce equally fortunate outcomes.