Presidents nor Congresses cause neither recessions nor
recoveries. If you don’t believe that,
please get a professional to invest your money.
But they do create an environment under which recessions and recoveries
play out. If you look at the last
century, however, politicians tend to regard recessions with grave concerns and
feel impelled to act. Let’s look at the
worst ‘crises’ of the last hundred years
and an interesting result appears.
1920. WWI was over and the drop in demand from
peacetime caught business off guard. GDP dropped 17%, second-only to the Great
Depression in severity. Unemployment went
from 4 to 12% and fed-up voters elected a dark horse Republican, Warren
Harding. Though later vilified for his
unrealized crooked friends when he was in office, and often said to be the
worst President for his inexperience, Harding went along with Congress which
was in an anti-progressive mood and wanted to get back to “Normalcy” after the war. They passed budget cuts, a balanced budget
and tax cuts. The economy took off like
a rocket. By 1923 unemployment was 2.4%
and a “roaring twenties” decade of growth occurred.
1929. US stock market crashed by 30% but no
recession happened. President Hoover
enacted huge tariffs, upped the marginal income tax rate from 25% to 63%, increased
spending 47%. Unemployment made a slight
comeback from 9% to 6% but then came a real worldwide recession triggered by
banking credit crisis in Europe, 1931.
The GDP declined 27%, unemployment went to 25% in 1932 and FDR expanded
the Hoover spending and taxation increases even more. Result were twin
long-term recessions of 1931 and 1937 that lasted until 1941 when unemployment
was 18%. WW II is often credited with
relieving the Depression but actually it just took 12 million men out of the
job market. Depressed levels of private
investment continued during the war.
1946. Truman proposed a Second New Deal and
conventional wisdom was that another post-war recession was inevitable. But Congress said No Deal and cut taxes and
spending. Result was a boom of
prosperity that continued through the 50’s. 3 recessions during this period but
all were mild.
1961. This was a mild recession (7.1% unempl.) but
everyone expected the newly elected liberal President Kennedy to scramble with
spending and tax increases in classic Progressive fashion. Instead he proposed a tax cut, though
spending did increase. Tax cut became
law right after his death in 1964.
Economy expanded well with 4.2% unemployment and 3% annual growths. End
of decade saw enormous spending growth.
1973. Nixon
scrambled to increase spending despite his price controls trying to control
inflation. “We are all Keynesians now.” The
recession was triggered by excess inventories.
Recovery had paltry GDP growth (1-2%) but continued inflation as Ford, then Carter
were Presidents.
1979. Another recession occurred that,
depending on your definition of recessions, lasted as a double-dip recession
until the end of 1982. Trigger was overspeculation in natural resources. GDP lost 6% but unemployment reached 11.8% in
the first year of Reagan. Unlike Nixon, Reagan
proposed a landmark 25% cut in income
tax(marginal 70% to 28%). By 1983
inflation had gone from 13.5% to 3.2.
GDP growth was routinely over 4%, a rare accomplishment in a first-world
country. Revenue nearly doubled in 6
years. But budget deficits continued because Congress spent it all. Nonetheless, the success of Reaganomics
convinced most of the public to pursue low tax/ limited spending policies which
continued through Bush41, Clinton, Bush43 and GDP grew continually by
2.5-3.5%. Second Bush tax cut in 2002Unemployment
was low and declined to 4.2% in 2006.
2007. Triggered by collapse of
housing bubble and speculative instruments.
An emergency “TARP” stimulus was passed, then under Obama another $787
billion stimulus was passed. Spending
increases unseen outside of the World Wars were enacted with unprecedented
deficits. Yet unemployment continued to climb to heights not seen since 1982, a
year after the recovery had begun in July 2009. Taxes were relatively
unchanged. GDP growth has averaged an anemic 1.9%.
What this story tells me is that
every time the government has cut spending and taxes, it created an environment
conducive to growth. When stimuli with
heavy spending and often heavy taxation occurred, it hampered the
recoveries. (forget the triggers and
causes of recessions. They happen a
multitude of ways and there is no such thing as a big stimulus needed to avoid
a worse recession--just Progressive yap.) Harding actually invented this “Reaganomics”
but he just called it common sense.
Cutting back is how your family gets finances under control when times
get tough. The policies often trigger a
decade or more of good economic activity thereafter. But when heavy stimulation is tried, it leads
to a pitiful economic environment. If an
era of good growth is coming, you don’t want to miss it with your investments.
Now here’s what is interesting about
2012. Should Obama win, we may be headed
for another 1946-like Congressional No Deal.
It is highly doubtful that Democrats will recapture the House and the
Senate will surely go more Republican since the Dems have so many seats to
defend. So what would a Republican
congress and a Progressive President do?
Congress controls the purse and with Senate cooperation would finally
land a realistic and austere budget on the President’s desk. If he doesn’t sign, I expect they would pass
a watered down version over his veto.
But conservatives in the House will keep spending in check, whether
Obama likes it or not. What if Romney is
President? Then I expect he will follow
his business instincts to curb spending and taxes. Either way, it could be a decade of wonderful
recovery from the 2007+ era.
Which we call Normalcy in America. Tom Harding--the inexperienced guy from Marion,
Ohio, out of his league, didn’t know how to staff a national government, who
was the dark horse the Republican convention elected when it deadlocked among 4
other well-known candidates—at least understood common sense.
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