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Morning Jay: Make No Mistake: the Economy Is Problematic for Obama

6:00 AM, Apr 6, 2011 • By JAY COST
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A media meme has developed about the economy and the 2012 election: if Barack Obama gets the unemployment rate at or below 8 percent, he will be well positioned to win reelection. To that end, the press greeted last Friday’s jobs report (the addition of 216,000 jobs, and unemployment falling to 8.8 percent) as though it was the first sunbeam of Morning in America, Version 2.0.

 As usual, we can head to the New York Times for the spin:

[A]s the unemployment rate ticked down, the hopes of Mr. Obama and his party ticked up: perhaps by the approaching election year they could claim vindication for the stimulus policies Democrats have enacted, or at least dodge the sort of blame that Republicans so effectively stuck them with last November in the midterm elections.

At the same time it has given Democrats new ammunition to argue that Republican efforts to cut spending could hurt the recovery just as it is gaining traction, and that forcing a government shutdown could put more people out of work.

The reality for the president, however, is much more complicated than the White House or its media boosters would have us believe.

When we abandon the quick-and-dirty methodology the MSM uses to analyze economic (or, for that matter, any) data, and instead look at matters in historical context, we see an economy that is at one of its weakest point since the end of World War II. As proof of this, consider the following chart. It tracks the actual performance of GDP from 1948 to the present, against a hypothetical scenario in which the economy grew at 3.43 percent every year. Why 3.43 percent? That is the average annual rate of growth in the economy between 1948 (the first year of postwar growth) and 2007 (the year before the current slowdown).

Any time we’re above the dotted line, it means we’ve grown faster than 3.43 percent per year up to that point. Any time we’re under it, it means we have grown slower than 3.43 percent up to that point. As we can see, for most of the postwar period, economic contractions did not knock us off a very robust growth rate. However, the economy has been in a relative wind-down for a decade, due to the fact that the recovery between 2001 and 2007 saw only one year of growth that was greater than 3.43 percent. Now, with the latest recession we have fallen significantly off the long-term trend line, and with growth expected to come in under 3.43 percent in the next two years, we’re going to fall even farther.  

This precipitous decline in the economy comes despite the fact that the federal government has pumped an unprecedented amount of cash into the private sector over the last three years. Obviously, the 2009 stimulus bill was the most notable such example, but there has been much more than that. The extraordinary extensions of unemployment benefits were stimuli. So was the increased level of domestic discretionary spending approved by the Democrats in the last Congress. So was the deal in December on cutting the payroll tax. Additionally, the progressivity of the income tax has been a kind of stimulus – as people’s incomes have fallen, the percentage of that income that has gone to the government has fallen as well. All in all, we have seen the federal government spend more than any point in decades, take in less, and run an unprecedentedly large budget deficit to finance the whole operation:

This does not exhaust the limits of federal stimulus. The Federal Reserve has kept interest rates at an extraordinarily low level for over a year now, as the following graph demonstrates.

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