The Slow-Motion Collapse of the Economy

Posted on February 3, 2015 by Loquitur Veritatem

Robert Higgs asks “How Much Longer Can the U.S. Economy Bear the Burdens?” (The Beacon, a blog of The Independent Institute, January 30, 2015). Higgs explains:

These burdens take the form of taxes, regulations, and uncertainties loaded onto them by governments at every level. Each year, for example, federal departments and regulatory agencies put into effect several thousand new regulations. Only rarely do these agencies remove any existing rules from the Code of Federal Regulations. Thus, the total number in effect continues to climb relentlessly. The tangle of federal red tape becomes ever more difficult for investors, entrepreneurs, and business managers to cut through. Business people have to bear not only a constantly changing, ever more complex array of taxes, fees, and fines, but also a larger and larger amount of regulatory compliance costs, now estimated at more than $1.8 trillion annually. Governments at the state and local levels contribute their full share of such burdens as well.

So it is scarcely a wild-eyed question if we ask, as economist Pierre Lemieux does in a probing article in the current issue of Regulation magazine, whether the U.S. economy is now reacting to these growing burdens by undergoing “a slow-motion collapse.”

The article by Lemieux (“A Slow Motion Collapse” (Regulation, Winter 2014-2015) ends with this:

The resilience of markets, especially in a rich and sometimes still flexible economy like the United States, has dampened the effect of regulation. However, it is reasonable to believe that, over the more than six decades since World War II, regulation has deleted a big chunk of potential prosperity. It has not actually cut into the average standard of living, but this is only a consolation prize, for worse could come if the regulatory bulldozer is not pushed back.

As Higgs suggests, the slow-motion collapse of the economy is due not only to regulation but also to taxation and what Higgs elsewhere calls “regime uncertainty.”

The combined effects of regulation, taxation, and regime uncertainty are captured in the Rahn curve, which depicts the long-term relationship between government spending (as a fraction of GDP) and the rate of economic growth. I say that because government spending and regulatory activity have grown apace since the end of World War II. That might be taken as certainty, of a perverse kind, but beleaguered entrepreneurs can never be certain of the specific obstacles that will be thrown in the path of innovation and investment.

The best evidence of the slow-motion collapse of the U.S. economy is the steady, long-run decline in the rate of economic growth, which is evident in the following graphs:

Real GDP 1947-2014

Year-over-year changes in real GDP

Annualized rate of real growth - bottom of recession to bottom of next recession
The graphs are derived from “Current dollar and ‘real’ GDP,” at the website of the Bureau of Economic Analysis of the U.S. Department of Commerce.

As the third graph suggests, the rate of growth has generally declined from business cycle to business cycle.* Thus:

Bottom-to-peak rates of growth

The “Obama recovery” is an anemic thing. Is it any wonder, given Obama’s incessant war on success?

It will take more than a “push back” to restore the economy — and liberty — to health. Obama and his ilk must be driven from office, and kept out of office for good.

* * *

___________
* Each business cycle runs from the bottom of a recession to the bottom of the next recession. Rather than rely on the National Bureau of Economic Research (NBER), I use my own own definition of a recession, which is:

two or more consecutive quarters in which real GDP (annualized) is below real GDP (annualized) for an earlier quarter, during which

the annual (year-over-year) change in real GDP is negative, in at least one quarter.

Unlike the NBER, I do not locate a recession in 2001. Real GDP, measured quarterly, dropped in the first and third quarters of 2001, but each decline lasted only a quarter.

My method of identifying a recession is more objective and consistent than the NBER’s method, which one economist describes as “The NBER will know it when it sees it.” Moreover, unlike the NBER, I would not presume to pinpoint the first and last months of a recession, given the volatility of GDP estimates.

Unsurprising News

Posted on April 15, 2014 by Loquitur Veritatem

John Taylor writes that “New Research Bolsters Policy Link from Uncertainty to Economy“:

Last week a joint Princeton-Stanford conference held in Princeton focused on policy uncertainty and showcased new findings on connections between policy uncertainty and political polarization and on patterns in different states, countries and time periods.

Danny Shoag, for example, presented new work “Uncertainty and the Geography of the Great Recession,” co-authored with Stan Veuger, showing that policy uncertainty across the United States has been highly and robustly correlated with state unemployment rates. As the authors explain, their “paper serves to counter such claims” as those made by Atif Mian and Amir Sufi that “an increase in business uncertainty at the aggregate level does not explain the stark cross-sectional patterns in employment losses” which had cast doubt on the role of policy uncertainty. Scott Baker, Nick Bloom and Steve Davis had written extensively on this at the national level and also presented new work at the conference.

I’ve written about Baker, Bloom, and Davis’s work here.

Ross Douthat comments about “Diversity and Dishonesty“:

Earlier this year, a column by a Harvard undergraduate named Sandra Y. L. Korn briefly achieved escape velocity from the Ivy League bubble, thanks to its daring view of how universities should approach academic freedom.

Korn proposed that such freedom was dated and destructive, and that a doctrine of “academic justice” should prevail instead. No more, she wrote, should Harvard permit its faculty to engage in “research promoting or justifying oppression” or produce work tainted by “racism, sexism, and heterosexism.” Instead, academic culture should conform to left-wing ideas of the good, beautiful and true, and decline as a matter of principle “to put up with research that counters our goals.”

Which reminds me of the story behind Robert Putnam’s “E Pluribus Unum: Diversity and Community in the Twenty-first Century,” which I recount here. In short, Putnam withheld publication of his paper because it refutes the leftist mantra “diversity is good.”

Finally, we are told by David Z. Hambrick and Christopher Chabris that “Yes, IQ Really Matters“:

The SAT does predict success in college—not perfectly, but relatively well, especially given that it takes just a few hours to administer. And, unlike a “complex portrait” of a student’s life, it can be scored in an objective way…. In a study published in Psychological Science, University of Minnesota researchers Paul Sackett, Nathan Kuncel, and their colleagues investigated the relationship between SAT scores and college grades in a very large sample: nearly 150,000 students from 110 colleges and universities. SAT scores predicted first-year college GPA about as well as high school grades did, and the best prediction was achieved by considering both factors. Botstein, Boylan, and Kolbert are either unaware of this directly relevant, easily accessible, and widely disseminated empirical evidence, or they have decided to ignore it and base their claims on intuition and anecdote—or perhaps on their beliefs about the way the world should be rather than the way it is.

Furthermore, contrary to popular belief, it’s not just first-year college GPA that SAT scores predict. In a four-year study that started with nearly 3,000 college students, a team of Michigan State University researchers led by Neal Schmitt found that test score (SAT or ACT—whichever the student took) correlated strongly with cumulative GPA at the end of the fourth year. If the students were ranked on both their test scores and cumulative GPAs, those who had test scores in the top half (above the 50^th percentile, or median) would have had a roughly two-thirds chance of having a cumulative GPA in the top half. By contrast, students with bottom-half SAT scores would be only one-third likely to make it to the top half in GPA….

[I]t is clear that [socioeconomic status] is not what accounts for the fact that SAT scores predict success in college. In the University of Minnesota study, the correlation between high school SAT and college GPA was virtually unchanged after the researchers statistically controlled for the influence of SES. If SAT scores were just a proxy for privilege, then putting SES into the mix should have removed, or at least dramatically decreased, the association between the SAT and college performance….

What this all means is that the SAT measures something—some stable characteristic of high school students other than their parents’ income—that translates into success in college. And what could that characteristic be? General intelligence….

IQ predicts many different measures of success. Exhibit A is evidence from research on job performance by the University of Iowa industrial psychologist Frank Schmidt and his late colleague John Hunter. Synthesizing evidence from nearly a century of empirical studies, Schmidt and Hunter established that general mental ability—the psychological trait that IQ scores reflect—is the single best predictor of job training success, and that it accounts for differences in job performance even in workers with more than a decade of experience. It’s more predictive than interests, personality, reference checks, and interview performance. Smart people don’t just make better mathematicians, as Brooks observed—they make better managers, clerks, salespeople, service workers, vehicle operators, and soldiers.

IQ predicts other things that matter, too, like income, employment, health, and even longevity. In a 2001 study published in the British Medical Journal, Scottish researchers Lawrence Whalley and Ian Deary identified more than 2,000 people who had taken part in the Scottish Mental Survey of 1932, a nationwide assessment of IQ. Remarkably, people with high IQs at age 11 were more considerably more likely to survive to old age than were people with lower IQs. For example, a person with an IQ of 100 (the average for the general population) was 21 percent more likely to live to age 76 than a person with an IQ of 85. And the relationship between IQ and longevity remains statistically significant even after taking SES into account. Perhaps IQ reflects the mental resources—the reasoning and problem-solving skills—that people can bring to bear on maintaining their health and making wise decisions throughout life. This explanation is supported by evidence that higher-IQ individuals engage in more positive health behaviors, such as deciding to quit smoking….

[T]he bottom line is that there are large, measurable differences among people in intellectual ability, and these differences have consequences for people’s lives. Ignoring these facts will only distract us from discovering and implementing wise policies.

Given everything that social scientists have learned about IQ and its broad predictive validity, it is reasonable to make it a factor in decisions such as whom to hire for a particular job or admit to a particular college or university. In fact, disregarding IQ—by admitting students to colleges or hiring people for jobs in which they are very likely to fail—is harmful both to individuals and to society. For example, in occupations where safety is paramount, employers could be incentivized to incorporate measures of cognitive ability into the recruitment process. Above all, the policies of public and private organizations should be based on evidence rather than ideology or wishful thinking.

As I say at the end of this post, “life just isn’t fair, so get over it.”

Where We Are, Economically (Updated)

Posted on October 26, 2012 by Loquitur Veritatem

Here. The bottom line: still stuck in a rut, thanks to Obama-nomics.

Where We Are, Economically

Posted on October 14, 2012 by Loquitur Veritatem

UPDATED (10/26/12)

The advance estimate of GDP for the third quarter of 2012 has been released. Real growth continues to slog along at about 2 percent. I have updated the graph, but the text needs no revision.

* * *

It occurred to me that the trend line in the second graph of “The Economy Slogs Along” is misleading. It is linear, when it should be curvilinear. Here is a better version:

Derived from the October 26, 2012 release of GDP estimates by the Bureau of Economic Analysis. (Contrary to the position of the National Bureau of Economic Research, there was no recession in 2000-2001. For my definition of a recession, see “Economic Growth Since World War II.”)

The more descriptive regression line underscores the moral of “Obama’s Economic Record in Perspective,” which is this:

The claims by Obama and his retinue about O’s supposed “rescue” of the economy from the abyss of depression are ludicrous. (See, for example, “A Keynesian Fantasy Land,” “The Keynesian Fallacy and Regime Uncertainty,” “Why the “Stimulus” Failed to Stimulate,” “Regime Uncertainty and the Great Recession,” The Real Multiplier,” “The Real Multiplier (II),”The Economy Slogs Along,” and “The Obama Effect: Disguised Unemployment.”) Nevertheless our flannel-mouthed president his sycophants insist that he has done great things for the country, though the only great thing that he could do is to leave it alone.

Obama is not to blame for the Great Recession, but the sluggish recovery is due to his anti-business rhetoric and policies (including Obamacare, among others). All that Obama can rightly take “credit” for is an acceleration of the downward trend of economic growth.

Economic Growth Since World War II

Posted on May 11, 2012 by Loquitur Veritatem

This post is now on a page of its own.

The Great Recession Is Barely Over … Maybe

Posted on November 22, 2011 by Loquitur Veritatem

UPDATED 12/22/11

The third estimate of real GDP for the third quarter of 2011 (3Q2011) is $15 billion lower than last month’s advance estimate. The annualized rate of $13,331.6 billion (in chained 2005 dollars) is only $5.6 billion above the estimate for the fourth quarter of 2007 (4Q2007), the last pre-recession quarter.

Based on the third estimate, real GDP grew at an annual rate of 0.011 percent — 11/1000 of one percent — between 4Q2007 and 3Q2011. In other words, real GDP in 3Q2011 is the same as it was in 4Q2007. Whether or not the Great Recession has ended is still up in the air and will not be known (possibly) until the release of GDP estimates for 4Q2011.

Regime Uncertainty and the Great Recession

Posted on October 8, 2011 by Loquitur Veritatem

I have pointed out that the Great Recession is not over.Nor is it likely to end anytime soon, given the anti-business, anti-growth policies and rhetoric of the Obama administration. (Making nice with crony capitalists like Jeff Immelt only underscores Obama’s cynicism.)

Economists Scott Baker, Nicholas Bloom, and Steven Davis have weighed in with a similar assessment; for example:

A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised [chart below] shows U.S. policy uncertainty at historically high levels….

Our index shows prominent surges in policy uncertainty around the time of major elections, the outbreak of wars and after the Sept. 11 attacks. It shows another surge after the bankruptcy of Lehman Brothers Holding Inc. in September 2008. Policy uncertainty has remained at high levels ever since….

Why has policy uncertainty increased so much? One argument holds that the recent financial crisis created an atmosphere of extreme uncertainty, bringing new and difficult policy issues to the fore. No doubt, the crisis presented policy makers with difficult choices in 2008 and 2009. But the persistence of policy uncertainty wasn’t inevitable. Rather, it reflects deliberate policy decisions, harmful rhetorical attacks on business and “millionaires,” failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship. (“Business Class: Policy Uncertainty Is Choking Recovery,” Bloomberg.com, October 5, 2011)

Here is the chart that accompanies the article by Baker, Bloom, and Davis:

The rampant uncertainty — due in large part to Obama’s policies and rhetoric — has prolonged the recession because businesses are loath to hire and make job-creating investments:

Source: Mark J. Perry, “The Jobless Recovery Is Really an Investment-less Recovery,” The Enterprise Blog, October 3, 2011.

Greg Mankiw sees it this way:

• The most volatile component of G.D.P. over the business cycle is spending on investment goods. This spending category includes equipment, software, inventory accumulation, and residential and nonresidential construction. And the recent economic downturn offers this case in point about the problem: From the economy’s peak in the fourth quarter of 2007 to the recession’s official end, G.D.P. fell by only 5.1 percent, while investment spending fell by a whopping 34 percent….

Myriad government actions influence the expected future profitability of capital. These include not only policies concerning taxation but also those concerning trade and regulation.

For example, passing the free trade agreement with South Korea, which has languished in Congress more than four years after first being negotiated, would be a step in the right direction. So would reining in the National Labor Relations Board; its decision to block Boeing from opening a nonunion plant in South Carolina may have been hailed by organized labor, but it surely did not hearten investors. (“How to Make Business Want to Invest Again,” The New York Times, September 10, 2011)

Stronger language about the negative effects of Obama’s policies can be found here:

Mark J. Perry, “Thanks to Regulatory Burdens, We’ve Got Both A Creditless Recovery and A Jobless Recovery” ( Carpe Diem, July 21, 2011)

Bruce McQuain, “Why aren’t we seeing a jobs recovery? Maybe it’s ObamaCare’s fault” ( Questions and Observations, July 21, 2011)

Jonathan S. Tobin, “Home Depot Founder: Obama’s Regulations Are Killing Businesses” (Commentary, July 21, 2011)

The present situation is scarily reminiscent of the Great Depression. As Robert Higgs writes,

the economy remained in the depression as late as 1940 because private investment had never recovered sufficiently after its collapse during the Great Contraction [of 1929-33]….

[T]he insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns. This uncertainty arose, especially though not exclusively, from the character of federal government actions and the nature of the Roosevelt administration during the so-called Second New Deal from 1935 to 1940. Starting in 1940 the makeup of FDR’s administration changed substantially as probusiness men began to replace dedicated New Dealers in many positions, including most of the offices of high authority in the war-command economy. Congressional changes in the elections from 1938 onward reinforced the movement away from the New Deal, strengthening the so-called Conservative Coalition. (“Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War,” The Independent Review, Spring 1997)

By way of closing the circle, I note that Higgs endorses Baker, Bloom, and Davis’s research.

It is more than evident that the only sure route to economic recovery is the replacement of Obama by a Republican (almost any one will do), and firm Republican control of both houses of Congress.

The Most Effective Stimulus…

Posted on August 9, 2011 by Loquitur Veritatem

…would be the replacement of Obama and Congress’s Democrats by free-market Republicans. See this and this.

Enough of Krugman

Posted on September 17, 2010 by Loquitur Veritatem

Paul Krugman, who has descended to the use of survey statistics, declares that small businesses aren’t hiring because their sales are down (“It’s Demand, Stupid“). Krugman has two points to make:

Small businesses aren’t cowed by regime uncertainty, taxes, and red tape, and all of those other “wonderful” things about which Krugman knows nothing.

The way to get out of the recession is to double down on “stimulus.”

Krugman’s first point aligns with his stubborn insistence — against mountains of evidence to the contrary– that government is benign and free-markets are malign.

Krugman’s second point aligns with his simplistic Keynsian view of the world, in which GDP is a homogeneous substance, like water, the level of which can be raised or lowered in a trice by government spending or the lack thereof. There’s no room in the Krugmanesque view of the world for real firms, run by real people, staffed by real people, producing myriad goods and services in myriad ways, and subject to the whims of Washington and thousands of State and local governments.

To say that small-businesspersons are reluctant to hire because there is inadequate demand for their products is like saying that a sick person is lying down because he doesn’t feel well. It’s a banal and incomplete interpretation of the situation. In any event, the fact that small businesses — and businesses in general — haven’t resumed hiring at the pre-recession rate is not an argument for mindless pump-priming. If it is an argument for anything, it is an argument for government to get out of the way.

Were the government a business, with a strong incentive to perform services of value to willing buyers, it would get out of the business of managing the economy and stick to what it does best: dispense justice and defend the nation. That it often fails to do those things well should be a clue to the Krugmans of the world about their risible faith in the wise, omniscient, and efficient government of their imagining.

There’s plenty more out there to indict and convict Krugman and his insistently wrong-headed view of the world. Here’s a minute sample:

Krugman and DeLong, a Prevaricating Pair
Professor Krugman Flunks Economics
The Negative Consequences of Government Expenditure
Regime Uncertainty: Behind the Reports of Economic Doom
Finally, Some Evidence from Krugman
Reviewing Krugman
In Pursuit of Empirical Macroeconomics
Krugman: Republicans Are Fiscally Irresponsible for Pushing Smaller Tax Cut, Threatening Much Larger One

To write about Krugman is to grant him the favor of being taken seriously. Basta!

Politics and Prosperity

“Government is a disease masquerading as its own cure.”

Tag Archives: regime uncertainty

The Slow-Motion Collapse of the Economy

Unsurprising News

Where We Are, Economically (Updated)

Where We Are, Economically

Economic Growth Since World War II

The Great Recession Is Barely Over … Maybe

Regime Uncertainty and the Great Recession

The Most Effective Stimulus…

Enough of Krugman

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