Understanding the Economy’s Recovery: A Closer Look
The National Bureau of Economic Research proclaimed that the Great Recession officially concluded in June 2009, suggesting that the U.S. economy has been in recovery for over two years. While this may be true in a technical sense, one must question the true nature of this recovery.
It has been quite bewildering. One moment, headlines are declaring that this is the worst economic downturn since the Great Depression, and the next moment, we are inundated with messages of optimism and recovery.
From our perspective, following the monetary policies and stimulus measures from the Federal Reserve, the only significant change we have witnessed is a rapid and prolonged boost in the stock market. We remain skeptical, viewing this as a mere “dead cat bounce” or a deceptive rally. With the mass amount of money printed over the past three years, a significant decline in the stock market could easily be obscured by inflation.
Nevertheless, outside of Wall Street, on Main Street—where the real economy exists—there’s one persistent question lingering in our minds as we evaluate the current economic situation:
Where Are the Jobs?
This is a straightforward question, yet it remains unanswered. Here is our perspective:
A Disturbing Employment Report
According to a report by AP last Friday, “A disappointing June employment report shows that employers are adding significantly fewer jobs than expected for this stage in a recovery.”
“Unemployment has increased for three consecutive months, now reaching 9.2 percent. In the history of economic data since 1948, such a high unemployment rate two years into a recovery is unprecedented.”
“In June, the economy generated just 18,000 jobs—a stark contrast to the 90,000 jobs economists anticipated and a fraction of the 300,000 jobs needed each month to make a considerable dent in the unemployment rate.”
Here’s a little secret: despite the claims from the Bureau of Economic Research, it seems the recession has yet to end. While perhaps the Federal Reserve and the Treasury managed to slow its effects, they may have inadvertently worsened the situation. Now, more than three years since the recession began, the economy appears to be slipping backward again. What will be their next move?
After slashing the federal funds rate to almost zero and employing two rounds of quantitative easing, the Federal Reserve seems to be out of viable options. Furthermore, Congress is currently engaged in heated budget discussions and may be reluctant to further utilize taxpayer money for additional stimulus efforts.
Even if they did pursue a new stimulus program, what benefits would it bring? The last several years have resulted in a 9.2 percent unemployment rate and lackluster GDP growth. As we’ve observed, the cost of creating each job through stimulus measures was approximately $278,000.
A Flawed Approach from the Start
The reality is that these stimulus and monetary policies were misguided from the outset. The belief that the government can simply conjure jobs out of thin air is a myth. Real jobs need to be sustainable, generating profit and providing goods or services that the market demands.
Paying individuals to perform meaningless tasks only drains wealth from the economy. What value does this create, other than misusing taxpayers’ funds? Such unproductive projects consume financial resources that could otherwise be invested in meaningful ventures.
Henry Hazlitt articulated this concept over 65 years ago with what he called the “broken-window fallacy.” In his example, a young vandal shatters a baker’s window. A crowd gathers, considering the supposed benefits this brings to the window repairman, who would spend his earnings at other local businesses—thus, some might argue, stimulating the economy. The vandal appears to be a benefactor, not a menace.
However, unbeknownst to the crowd, the baker had planned to purchase a new suit. Now, instead of buying a suit, he must replace the window, resulting in a net loss: one window and one suit gone. The glazier’s gain equates to the baker’s loss. Ultimately, breaking that window did not even benefit the economy.
Hazlitt’s assertion is both clear and compelling. Yet, this fallacy endures, finding its way into the recommendations of many PhD economists today, complete with convoluted reports and intricate charts—think Paul Krugman.
When the economy first began to falter in late 2008, Krugman and other prominent economists advocated for a substantial stimulus package. In February 2009, soon after taking office, President Barack Obama enacted the American Recovery and Reinvestment Act, effectively squandering $787 billion.
This spending didn’t just disappear; it took part of the future with it—the $787 billion, along with interest, will burden taxpayers for years to come as they repay the debt incurred from this initiative. Remember this the next time you hear someone naïve praise the virtues of government spending to rejuvenate the economy. This misguided notion is not going away anytime soon.
Sincerely,
MN Gordon
for Economic Prism
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