When Will the Economy Recover?

Mon, 09 Mar 2009 16:25:01 +0000 – By Peter Ferrara
Director of Entitlement and Budget Policy for the Institute for Policy Innovation/ General Counsel for the American Civil Rights Union

When should we expect recovery from the current economic crisis?

The National Bureau of Economic Research is considered the official scorekeeper as to when recessions start and end. The Bureau scored the current recession as starting in December, 2007.

According to the Bureau's records, the average recession since World War II has been 10.4 months long. The longest recession in the postwar era has been 16 months.

The current recession is already in its sixteenth month -- longer than the postwar average. By next month, it will be the longest recession since World War II.

By May or June, I would start to ask whether Obama's policies are promoting recovery or delaying recovery. My analysis is that his policies will delay and slow recovery.

The stimulus package of almost $1 trillion will only stimulate increased welfare, government spending, and higher deficits. Borrowing $1 trillion out of the private economy to put it back into it through increased government spending does not add anything to the economy on net. Nor does it do anything to improve incentives for saving, investment, starting or expanding businesses, job creation, entrepreneurship, and work, which are what really govern the economy.

Rather, that stimulus borrowing, and the entire $2.7 trillionthe Obama budget says the federal government will borrow from the private sector this year, will drain the private sector of funds that are needed for recovery.

Obama also proposes new global warming cap and trade legislation that his own budget projects will impose $645 billion in new costs on the economy. Those policies will lead to sharp increases in the prices of electricity, home heating oil, and natural gas. I expect those policies and the renewed restrictions on oil production the Obama administration has already adopted will eventually surge gas prices over $5 a gallon as well, which Obama thinks is good for the environment. But none of this is good for the economy.

Obama proposes increases in individual income tax rates, capital gains tax rates, dividends tax rates, and estate taxes to take effect in 2011. Maybe eventually increases in payroll tax rates too. Those future tax increases, however, will soon begin to affect economic decisions, dampening any recovery.

When the recovery begins, I expect the huge deficits and federal borrowing Obama has proposed to start driving up interest rates. I would also expect the Fed's loose monetary policies to lead to inflation after the recovery arrives as well. The Fed is now saying it will quickly reverse course and tighten monetary policy after the recovery to preempt inflation. But that would cause interest rates to rise sharply, so I think the Fed will back off of that out of fear of short-circuiting the recovery.

Higher interest rates, resurgent inflation, and the specter of increased taxes will slow the recovery, leaving persistent unemployment too high. The stock market will recover some ground in the spring, but higher interest rates, inflation, and looming tax rate increases will mute that. Eventually, I would expect these factors to cause another recession, probably in late 2010 or early 2011, not as bad as the current one, but still causing continued pain and suffering. The stock market would probably turn down again before that second double dip recession.

In other words, over the long run, the economy will look very much like it did in the stagflation era of the 1970s, complete with Jimmy Carter's gas shortages, which is to be expected as Obama returns to the policies of that era.

Peter Ferrara serves as Director of Entitlement and Budget Policy for the Institute for Policy Innovation, and General Counsel for the American Civil Rights Union. He formerly served in President Reagan's White Office of Policy Development, and as Associate Deputy Attorney General of the United States under the first President Bush. He is a graduate of Harvard College and Harvard Law School.