U.S. Economy the May 2007 Economy Presented

U.S. Economy

The May 2007 economy presented a rosy picture: the lowest unemployment rate of the Bush Administration 4.4% (Bureau of Labor Statistics.gov. 2012. PP. 1), the peak of housing values, strong GDP growth of 3.6% (Trading Economics.com. 2012. PP. 1), a stable inflation rate of 2.2% (Trading Economics.com. 2012. PP. 1), and a normalized non-emergency FED Funds of 5.25% (Moneycafe.com. 2012. PP. 1). Yet, the collapse was imminent as the "Great Recession" began in the fourth quarter of 2007, decimating the economy and bringing the global financial system to a grinding halt. Now five years later the economy is regaining its footing in a ponderous yet upward trajectory which began in the second quarter of 2009. An espy of May 2012 presents a dramatically different story than of 2007: unemployment stands at 8.1% (Bureau of Labor Statistics.gov. 2012. PP. 1), housing values have plummeted; "Americans overall have lost almost $7 trillion in housing wealth -- more than half of the nation's total home equity, according to the Federal Reserve" (U.S. News.com. January 24, 2012. PP. 1), GDP growth is lumbering at two percent (Trading Economics.com. 2012. PP. 1), and the FED has kept the accommodative spigots open since 2009 with a target funds rate of 0-.25% (Moneycafe.com. 2012. PP. 1). About the only similarity in the pictures is the inflation rate which is holding at 2.3% (Trading Economics.com. 2012. PP. 1).

Policy Measures

The intervening five years have seen fiscal and monetary policy measures which are unparalleled since the Great Depression. Massive Keynesian stimulus: 814 billion, auto bailouts, TARP, Cash for Clunkers, home refinancing modification programs, and short-term targeted tax cuts (payroll). As for the FED the near zero exigent rates are now promised into late 2014, and the central bank has provided massive liquidity injections in the form of Quantitative Easing I, II, and Operation Twist (1960 Redux). This confluence of fiscal and monetary measures has given the economy a heartbeat, but has not produced the massive surge in activity which has been the historical norm since World War II after deep recessions.

The nearby chart compares rates of quarterly growth during the Reagan and Obama economic recoveries. The comparison is apt because both recoveries followed deep recessions in which the jobless rate reached more than 10%. Once the Reagan recovery got cooking, in 1983, growth stayed above 5% for 18 months and never fell below 3.3% for 13 consecutive quarters. In the Obama recovery, growth has never exceeded 4% in any quarter and fell off markedly in mid-2010 through the third quarter of 2011. For the first nine months of 2011, growth averaged less than 1.2%. The economy finally picked up again in the fourth quarter, but still at a rate that is subpar for a recovery that long ago should have become robust and durable. (the Wall Street Journal.com. January 25, 2012. PP. 1)

The issue now is what policies should be enacted to drive a return to long-run economic growth of three plus percent, rising incomes, and a reduction in the unemployment rate? To start, the FED must begin to normalize the FED funds rate to incentivize savers and investors back into the marketplace. Zero rates are deleterious to long-term investment and particularly sting those on fixed incomes. From the fiscal side, a reduction in the corporate income tax from its OECD high rate of 35% (Baker, L. April 3, 2003) to 20-25% would spur economic growth and subsequently hiring, by lowering an organization's service price of capital. A second measure would be to reduce marginal tax rates across the board by 20% as Republican candidate Mitt Romney has proposed. More disposable income leads to more discretionary income, business sees revenue increases, identifies cap-ex opportunities, and ultimately hires more employees. Looking for a non- tax measure? How about reducing the regulatory burdens on business which provide obturations for growth and expansion? The Federal government is intertwined in the business community, a typical example being antitrust policies.

Consumers

One of the noteworthy aspects of the U.S. economy is that consumer spending