Doomed from the Get Go

According to the National Bureau of Economic Research the Great Recession ended in June 2009.  That means the U.S. economy has been in recovery for over two years. Perhaps, semantically, this is so.  But just what type of recovery is this?

It all seemed so peculiar.  One day the newspaper headlines were proclaiming this was the worst economic collapse since the great depression.  The next day all we heard was optimism and economic recovery.

From our vantage point, after all the stimulus and monetary shenanigans from the Federal Reserve, the only notable change we observed was a rapid and prolonged stock market recovery.  We still believe this is a dead cat bounce…a suckers rally for the ages.  But with all the funny money printed over the last three years a dramatic stock market decline could be masked by monetary inflation.

Regardless, off of Wall Street, down on Main Street, where the real economy is, there is one question we can’t seem to shake when assessing the condition of today’s economy…

Namely, where are the jobs?  A simple question, indeed.  Nonetheless, a simple question without an answer.  Here’s what we mean…

A Little Secret

“A dismal June employment report shows that employers are adding nowhere near as many jobs as they normally do this long after a recession has ended,” reported AP last Friday.

“Unemployment has climbed for three straight months and is now at 9.2 percent.  There’s no precedent, in data going back to 1948, for such a high rate two years into what economists say is a recovery.

“The economy added just 18,000 jobs in June.  That’s a fraction of the 90,000 jobs economists had expected and a sliver of the 300,000 jobs needed each month to shrink unemployment significantly.”

Here we’ll pause to let you in on a little secret… Despite what the Bureau of Economic Research says…the recession never ended.  Perhaps the Federal Reserve and the Treasury slowed it down and stretched it out.  But that may have just made things worse.  Now, three and a half years after the recession began, the economy is backsliding again…and what will they try next?

After lowering the federal funds rate to practically zero and trying two programs of quantitative easing, the Federal Reserve’s bag of tricks has come up empty.  What’s more, Congress is in the midst of a fierce budget debate and will be hesitant to further use tax payer dollars, and deficit spending, to fund another stimulus program.

Besides even if they did, what good would it do anyway?  The experience over the last several years has yielded a 9.2 percent unemployment rate and meager GDP growth.  From what we gather the cost per job created by stimulus was about $278,000.

Doomed from the Get Go

Of course, the stimulus and the monetary schemes were doomed from the get go.  The idea that the government can wave their wand and magically create jobs is a fantasy.  A real job must be self-supporting.  It must generate a profit and provide a product or service that the economy demands.

Paying people to dig holes and fill them back in subtracts wealth from the world.  What compensation, other than misappropriating the tax payer’s dime, does it merit?  Useless make work projects drain away the availability of capital that would otherwise be put to use for a productive end.

Henry Hazlitt clarified this point 65 year ago with his description of what he called the “broken-window fallacy.”  In Hazlitt’s description, a young hoodlum heaves a brick through the window of a baker’s shop.  As a crowd gathers they begin contemplating the benefits this will have to the window glazier, who in turn will spend his proceeds with other merchants…giving the town an economic boost.  The hoodlum, you see, is not a public menace, but a public benefactor.

Yet, unbeknownst to the crowd, the baker was planning on buying a new suit.  But now he can’t because he must buy a window.  So the baker is out a window and a suit.  And the glazier’s gain is the baker’s loss.  In conclusion, the broken window did not boost the economy after all.

Hazlitt’s point is both logical and obvious.  But for some reason this fallacy still persists in the recommendations of PhD economists to this day.  These recommendations are provided by the economists who write incomprehensible reports, with incomprehensible charts…like Paul Krugman.

When the economy turned in earnest in late 2008 Paul Krugman and other influential economists argued in favor of a massive stimulus bill.  In February 2009, shortly after taking office, President Barack Obama signed the American Recovery and Reinvestment Act into law.  What he did was essentially flush $787 billion dollars down the toilet.

But down the toilet with the cash also went part of the future…the $787 billion dollars – plus interest – which will be subtracted from the future for years to come as tax payers pay down the debt on this misadventure.  Keep this in mind next time you hear some moron delight in the virtues of using government spending to boost the economy.  We haven’t seen the last of this nonsense.


MN Gordon
for Economic Prism

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