Why The Reagan Recovery Was Much More Impressive Than Obama's

James Pethokoukis, The American Enterprise Institute Blog

Read more: http://www.businessinsider.com/why-the-reagan-recovery-was-much-more-impressive-than-obamas-2012-1#ixzz2jOpJoXeiMy pal Joe Weisenthal over at Business Insider just wrote a piece – in response to a post I wrote earlier today — with the delightfully provocative and contrarian headline, “Why The Obama Recovery Has Been Much More Impressive Than Reagan’s.”
Nope, I’m not making this up. See for yourself.
Let’s be perfectly clear, the Reagan Recovery (RR) has been far stronger than the Obama Recovery (OR). I think that is beyond dispute, really.
– In the first ten quarters of the OR, GDP is up a total of 6 percent. During the first ten quarters of the RR, GDP rose 15 percent.  Point for Reagan.
– In the first ten quarters of the OR, the economy created 790,00 jobs. During the first ten quarters of the RR, the economy created 7.5 million jobs  Point for Reagan, especially given the U.S. workforce is a third bigger today than it was in the early 1980s.
– In the first ten quarters of the OR, real disposable personal income rose at an annual average pace of 0.8 percent. During the first ten quarters of the RR, real disposable personal income rose at annual average pace of 5.4 percent. Point for Reagan. Game. Set. Match.
But Brother Weisenthal is making a subtler, more subjective point. He is arguing that, for a number of reasons, the Obama Recovery is more impressive than the Reagan Recovery. Not stronger, more impressive because Obama was dealt a worse hand. Among Weisenthal’s points:
1. “There are at least some economists who argue that post-financial crisis economies experience unusually slow growth for years and years.”
Me: Indeed, there are. But there are also some who disagree.  A Federal Reserve study released last November found the following:

Whether a recession is associated with a banking or financial crisis does not have a statistically significant effect on the pace of growth following recession troughs. … Banking and financial crises are associated with more severe recessions – deeper in the case of emerging market economies and longer in the case of the advanced economies – but do not appear to impose additional restraint to recoveries beyond the depth and duration.

2. “The problem is that Pethokoukis is … defining housing bust purely in terms of housing construction, while ignoring the real elephant in the room: The collapse in home prices, and the knock-on effects it has had on the economy.”
Me: I don’t disagree that the “knock on effect” such as loss of wealth may well be a drag on growth. That Fed study makes the same point:  … “recoveries from recessions associated with severe housing downturns are found to be slower.” Well, there is a difference between slow and virtually non-existent, right? Again, the Reagan  Recovery 10-quarter growth rate was 6 percent vs. 4.6 percent for the average post-WWII recovery vs. 2.4 percent for the Obama Recovery. And
And the impact of a deleveraging and a reverse wealth effect are not as clear as Weisenthal contends. Note that personal consumption as increased for 10 straight quarters and the savings rate remains extraordinarily low. But I think this chart, from the NY Times, raises big questions about the deleveraging argument:

Where is the deleveraging? It looks like debt has shifted from private to public. Let me quote a Michael Pento piece from BI, of all places: “Although it is certainly true that after decades of overly speculative borrowing, individuals and corporations are paying down debt, rebuilding their savings, and generally repairing their respective balance sheets. But these activities cannot be faulted for our economic malaise. In fact, as a country, we haven’t deleveraged at ALL. All the moves made by the private sector have been vastly outpaced by the federal government’s efforts to add leverage to the economy.”

3. If you really want an apples-to-apples comparison, it’s hard to fathom why Reagan doesn’t have to answer for a recession happening so soon on his watch, and why he only gets measured on those two years. What’s mor …  the 1984-1988 period was pretty average, so we’re really just talking about two years of really impressive morning-in-America growth.
Me: I think Paul Volcker cranking interest rates through the roof might have had a role in the recession as he attempted to squeeze out the inflation of the 1970s. The 1981-82 recession was the culmination of really 16 years of economic mismanagement. One sign of this: The Dow industrials fell by two-thirds when adjusted for inflation from 1966-1982. (From 1983-1988, the S&P composite notched a real return of 13 percent a year.) The entire previous decade marked by tremendous economic volatility, high unemployment,high inflation. Reagan inherited a mess.
As for GDP growth, it averaged 4.4 percent from 1983-1988 vs. roughly 3.3 percent since WWII. So I am pretty sure growth was markedly above average.  A recent IMF forecast, by the way, predicts sub-3 percent US GDP growth through 2016.

4. “We could of course go on, and point to several other factors in Obama’s favor, such as the fact that tax rates had already been lowered quite a bit heading into his presidency, taking away one easy form of stimulus, or the fact that a major trading partner, Europe, has been in crisis virtually the whole time of Obama’s Presidency, or the fact that Obama faced a Congress who threatened to cause the U.S. to default, or the fact that interest rates were ultra-low already, again taking away one form of stimulus from Obama.”
Me: Gosh, I wonder what U.S. GDP growth would have been in the 1980s had China been the second largest economy in the world growing at 10 percent a year, boosting global growth. Instead, it was the stagnating Soviet Union in the number two spot.  In the 1980s, one-third of the planet lived under communism sapping all that human vitality and creativity (and trade) out of the world economy. And I am not sure about JW’s point about taxes and interest rates. Is he saying that Obama has a much more constructive tax and rate environment and still couldn’t get the economy cooking?
 Bottom line: People were amazingly pessimistic heading into the 1980s after the economically tumultuous 1970s. America seemed to be in decline both economically and militarily. And corporate America was desperately in need of restructuring. (Thanks, Bain!) Obama inherited a much healthier non-financial private sector.
This is what the American people had just gone through, by the way (via MeasuringWorth):

Imagine going back in time and showing these economic statistics from the next 25 years:

Growth up, stocks up, inflation down. Oh, and the Soviet Union gone. Safer, Stronger. Better. Instead of the Soylent Green future of diminished expectations people were predicting in the 1970s, we got something more like the shiny, growthy one shown in Back to the Future II.
Obama has some big shoes to fill.

This post originally appeared at The American Enterprise Institute Blog. Copyright 2013.

Read more: http://www.businessinsider.com/why-the-reagan-recovery-was-much-more-impressive-than-obamas-2012-1#ixzz2jOp2ldK2

How the U.S. Tax Code is destroying Manufacturing

Another Abandoned Factory Building in America

We have a Crisis here in America, and while it's something that many are talking about, the solutions that are being proposed will not help and will only exacerbate the situation and make it much, much worse.

Manufacturing in the U.S. is in STEEP decline, but not for the reasons we've been told.  The truth is that most politicians don't want to talk about the real reason, mostly because of how our media here in the U.S. will handle this kind of coverage.

According to The American Prospect, between 2001 through the end of 2009, American Manufacturing has lost over 42,400 factories.  YES that's not a typo,  Factories not jobs.  Each of these factories employed an average of around 400 employees!  While there are no good statistics between 2009 to current, a trip through places like Ohio and Michigan will tell you that the situation has only deteriorated.

Almost every article that you read on this issue will tell you that the reason manufacturers are leaving the U.S. is because labor costs are cheaper in China.  While this may be true for low cost, low tech products, the truth is that U.S. manufacturers enjoy a MASSIVE edge in efficiency that translates to lower total manufacturing costs in the U.S. vs overseas counterparts.  A look at the Steel industry confirms this.  The Chinese use over 10X the man hours to produce a ton of steel vs. the U.S. and similar comparisons can be made everywhere.  If the issue was simply labor costs being cheaper in China, you would see the Ship building industry in Norway decimated, since they have some of the highest cost of labor in the world.  Same for the Japanese and the Germans.  They are not what you would call "Low Cost Labor".  Yet their Manufacturing sectors remain extremely robust.

Royal Caribbean Cruise Lines provides a fantastic reference point for this.  They recently purchased 2 ships in Norway costing upwards of 1.5 Billion Dollars each.  Think about this, the average U.S. Dock worker gets a total compensation of around $80K a year, including benefits.  They are considered one of the most efficient in the world, requiring less man hours for production than almost any laborers in the world.  Why then would the ship building company not have these ships built in the U.S., considering that in Norway similar workers cost a total of around $120K per employee in total compensation and in U.S. Dollars?  It's very simple, it has to do with our expensive and extremely complicated Tax code.  Norway actually has one of the highest individual tax rates in the world.  Most middle class families pay between 40 to 60% of their income in taxes (Including SS).  However, not wanting to kill the Golden Goose, Norway keeps Corporate taxes fairly low at an average of 28%.  Additionally, capital expenditures and interest payments are fully tax deductible.  What does this mean?  Well, Let's say that there's a ship builder here in the State of NY.  Between City, Local and Federal taxes, that ship builder will have to pay around 45% in taxes.  Additionally, capital expenses must be depreciated over a 5 year period.  This means that if the manufacturer has to upgrade their facilities every year in order to stay competitive, that company STILL must pay taxes on 80% of the money used in the capital expenditure.  This is a HUGE competitive DISADVATAGE that our companies have to bear here in the U.S.  Not only are we telling our companies that they have to pay taxes on improvements to their facilities, but additionally we're going to charge them more than just about any other country in the world.

Why Nothing Is Done

The reason why we don't see anyone doing anything with this is very simple.  Instead of talking about the real reason why manufacturing is declining in the U.S. Politicians would rather paint enemies and talk about how this person or that company is "exporting" jobs.  If anyone dares talk about reducing tax rates on Corporations, they are considered a "Shill" for the rich and the "Right Wing Extremist" and dismissed as idiots.  If we can't, as Americans face reality and realize that we're giving away the store, by keeping manufacturing tax rates so high here in the U.S.  We're going to continue losing more and more jobs to countries overseas that have much friendlier policies towards Corporations.  For those of you who say that it's still more patriotic to keep the jobs here and not to be so "Greedy", I'm sorry but in the world of manufacturing simply does not cut it.  When Sony or HTC or Samsung upgrades their product line every 6 months, the ONLY way that a U.S. company can stay competitive is to at least match the same upgrade schedule.  If Japan, China or Korea allow these companies to fully deduct those capital expenditures, yet here in the U.S. we won't, then guess what.  Zenith, Motorola and RCA end up having to shut down their U.S. Operations because they simply CANNOT compete.

A Plan like 9, 9, 9 would definitely go a long way towards fixing a lot of these issues, but with Cain out of the race, the truth is that his plan is a long shot for anyone to pick up.  Not because it's a bad plan, but because most Politicans don't want to be seen as ripping off someone else's idea.  Well, here's an idea that any politican can rip off from me and I won't say a word.  The 10, 10, 10 Plan with no national sales tax:

• 10% Flat Corporate Tax Rate
• 10% Flat Personal Income Tax
• 10% Flat Import Tax

It has all the advantages of Cain's plan, without the disadvantage of the National Sales Tax, while giving our manufacturers a slight edge over imports, while at the same time eliminating the taxation barriers they previously had to overcome.

White House 3M Jobs Figure Not Based on Real Numbers

Three Million Jobs: Really?   [Veronique de Rugy]

The White House can repeat these “jobs saved or created” numbers as often as it wants; it won’t make them true. Consider this Business Week report on a study released today by the Council Of Economic Advisers:

The report says the stimulus has “saved or created” about 3 million jobs, and is moving toward a goal of 3.5 million jobs by the end of the year, according to an administration official speaking on condition of anonymity before the report’s release today.

As it turns out, when you unpack the numbers, you find that Romer and her team didn’t actually count how many people got a job thanks to the stimulus. Instead, the number is a projection that relies on the myth that a dollar of government spending creates up to 2.5 dollars of economic growth.

That’s strange. Robert Barro of Harvard University has estimated that, even in the best-case senario, $1 of government spending will generate between $0.40 and $0.70 ofeconomic growth, i.e., much less than the amount of growth that we would get if that dollar was invested privately. What’s more, if that dollar has previously been taxed out the economy, then the overall effect of $1 of government spending is a destruction of $1.10 of economic growth. Not exactly the rosy projections that Romer is touting today. (And Barro is not alone. Even the most optimistic projections of the economic effect of government spending never display such numbers. Never.)

Recovery.gov, which actually counts the number of jobs created (if in a very favorable light), only displays roughly 680,000 jobs, not 3 million. Why would the White House not up that number if in fact 3 million jobs had been created? Because they don’t have names and addresses to back up their gargantuan projections.
 
The business community itself doesn’t seem to know where these miraculous jobs are. A few weeks ago, the chairman of the Business Roundtable — the association of top corporate executives that has been President Obama’s closest ally in the business community — accused the president and Democratic lawmakers of creating an “increasingly hostile environment for investment and job creation.” The stimulus, they say, is hurting them, not helping:

“In our judgment, we have reached a point where the negative effects of these policies are simply too significant to ignore,” Seidenberg said in a lunchtime speech to the Economic Club of Washington. “By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses.”

Romer, on the other hand, lives in a fantasy world where the administration’s policies will encourage investment:

The economic stimulus legislation pushed by U.S. President Barack Obama last year will help encourage $280 billion of investment by private industry and local governments, according to an administration report being released today.
The analysis, by the White House Council of Economic Advisers, estimates that about $100 billion in government grants, loan guarantees, interest subsidies and tax breaks will be matched almost three-to-one by other spending on clean energy projects, economic development and building construction.

Well, not exactly: The Federal Reserve has calculated that almost $2 trillion of capital is sitting on the sidelines right now, waiting for the government to stop its policy of destruction. The business community is not investing $1.8 trillion because of the uncertainty injected by the government’s policies, including the stimulus.
 
I am about to release the third Stimulus Facts report based on Recovery.gov data, which show that four out of five jobs created were created in the public sector. Remember the promise made by Romer herself when the stimulus was passed, that the bill would create 3.5 million jobs in two years, mostly in the private sector? Almost two years later,682,370 jobs were reported created, not 3 million, and over 510,000 of these were in the public sector. (My preliminary data is online here; my paper on whether government spending stimulates economic growth is here.)

Basically, the White House can claim all the job creation that it wants. The data show a completely different story. I am testifying before Congress and Rep. Paul Ryan at 1 p.m.to make these points.