Friday, June 01, 2012
You would think $1 trillion in spending stimulus and $2.5
trillion of Fed pump-priming would produce an economy a whole lot stronger than
1.9 percent GDP, which was the revised first-quarter number. And you’d think
all that government spending would deliver a whole lot more jobs than 69,000 in
May.
But it hasn’t happened.
The Keynesian government-spending model has proven a
complete failure. It’s the Obama model. And it has produced such an anemic
recovery that frankly, at 2 percent growth, we’re back on the front end of a
potential recession. If anything goes wrong — like another blow-up in Europe —
there’s no safety margin to stop a new recession.
And that brings us to the grim May employment report,
which generated only 69,000 nonfarm payrolls. It’s the third consecutive subpar
tally, replete with downward revisions for the two prior months. It’s a
devastating number for the American economy, and a catastrophic number for
Obama’s reelection hopes. All momentum on jobs and the economy has evaporated.
Inside the May report, the data is just as bad. The
unemployment rate rose slightly from 8.1 to 8.2 percent. The so called U6
unemployment rate, tracking the marginally employed or completely discouraged,
increased to 14.8 percent from 14.5 percent. And labor earnings are barely
rising at 1.7 percent over the past year, almost in line with the inflation
rate. In fact, through April, after-tax, after-inflation income is scarcely
rising at 0.6 percent for the past year.
The private workweek also fell in May. So did the
manufacturing workweek and aggregate hours worked for all employees. The
small-business household survey did rise, but that follows declines in the
prior two months.
Barack Obama doesn’t get this, but businesses create
jobs. And firms have to be profitable in order to hire. Yet the president is on
the campaign trail criticizing Mitt Romney by degrading the importance of
profits. Huh?
Without profits businesses can’t expand. And if they
don’t expand, they can’t hire. And if they don’t have profitable rates of
return, they’re not going to attract new capital for investment.
Which brings us to a couple of important reasons for the
virtual freeze in hiring.
First there’s the fiscal tax cliff. If all the Bush tax
rates go up, incentives will go down and liquidity will leave the system. You
can’t pick up a newspaper these days and not find a story about how the fiscal
cliff is elevating uncertainty and slowing U.S. growth. House Speaker John
Boehner asked Obama for help in extending the Bush tax cuts this summer. But
Obama said no. Instead, he wants to raise marginal tax rates on successful
upper-income earners, capital gains, dividends, estates, and many successful
corporations.
Where’s the corporate tax reform that would lower rates
and broaden the base and end the double-taxation of the overseas profits of
American companies? A business tax cut would help enormously, but it’s nowhere
in sight. Neither is the Keystone Pipeline, which is a surefire job-creator.
Obama’s too busy trashing Bain Capital profits and Romney’s business career,
both of which, by the way, have recently been praised by former president Bill
Clinton. (It was Clinton, you might recall, who lowered investment taxes and
presided over an economic boom.)
A second uncertainty facing businesses is the Supreme
Court decision on Obamacare due in a few weeks. If all those crazy
tax-and-regulation mandates are deemed unconstitutional, it’s Katy bar the door
as businesses put profits to work and hire. But they’re not going to move until
they see that court decision.
Then there’s the whole European mess with the threat of
banking contagion from Spain, Greece, and Italy. That could blow up the whole
world economy if it goes completely sour. The Europeans should guarantee all
bank deposits, interbank loans, and bank debt until this story is straightened
out. But they’re not. So the problem festers.
And now European companies are withdrawing money from
local banks and investing in dollars (especially through Treasury bonds that
are yielding an incredibly low 1.5 percent). But the rapid rise of King Dollar
is generating commodity deflation, which is a deterrent to manufacturing
production. According to the May ISM report, manufacturing is slowing.
The Fed may yet launch a new quantitative easing to stop
commodity deflation and accommodate the gigantic worldwide dollar demand. But
the merits of this move are dubious. On the other hand, an extension of the
Bush tax cuts right now would stop the economic and job slide and reestablish
certainty.
In fact, all the countries around the world should move
to the supply side with lower tax rates to spur economic-growth incentives.
Europe, China, and Latin America ought to go back and read Ronald Reagan’s
speeches and examine his actions when he faced a similar crisis 30 years ago.
It would be an hour or two well spent.
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