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The Great Stagnation

10/22/2015

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​ Most economic books define a recession as two consecutive quarters of negative GDP (Gross Domestic Product, the value of all goods and services produced in an economy in a calendar year).  However, that is not the real world meaning.  As defined by NBER, a recession is a significant decline in activity, spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail sales; NBER (National Bureau of Economic Research) is the non-profit agency located out of Cambridge which determines when we enter and exit a recession.    

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The most recent recession (financial crisis) lasted from December 2007, to June of 2009, and while it was not the worst recession of the great depression (the double dip recession of the early 80's has that distinction), at 16 months, it was the longest.  As you can see from the attached chart, the metric were much worse during the early 80’s double dip recession.  Interest rates were much higher, and unemployment stayed above 10% for 8 months peaking at 10.8%.  This is because the 1st dip of the recession was caused by huge increases in the price of oil and other commodities and the 2nd dip was caused by the FED raising interest rates in order to “break the back” of inflation, which it accomplished.
     By contrast the 2007-09 recession had no inflation, because the recession was caused by a deficiency in aggregate demand and unemployment was above 10% for only 1 month peaking at 10.2%.  

​    During a recession, there are a number of metrics that always go down; GDP, business Investment in capital and structures, employment (which means that unemployment increases), aggregate disposable income and consumption and during the following expansion they recover.  But under the Obama Administration we have experienced the slowest recovery from a recession since the depression.  Unemployment remained above 8% for 43 months, the previous 40 year average was 5.7%, and while the 40 year average for GDP growth is 3.1%, the Obama administration has had an average below 2.5%.  While the last recession has been referred to as the great recession, I will characterize the recovery as the great stagnation as a result of his policies and regulations.
​​First unemployment; under his administration, unemployment benefits from the state are  usually 13-26 weeks, the Obama Administration extended it to 99 weeks.  As a result, the long term unemployment rate, those unemployed for more than 26 weeks, was twice as much as the double dip recession since it took away the motivation to find a job.  In some states, such as Massachusetts, you could receive u to $900/week in benefits.  Also he failed to authorize the Keystone pipeline during the recession that could have created over 10,000 jobs and pumped billions of dollars into the suffering economy.  ​He has given the EPA free reign and they have declared war on coal shutting down over 100 plants which have cost 20,000 jobs in that industry and 10,000 jobs in the coal mining industry
      The cost estimate of Obamacare for 10 years has tripled from $900 billion to more almost $3 trillion, premiums have risen dramatically and the number of part time workers has increased by 35% during the 1st two years.
   Also as a result of Obamacare, taxes have increased, both Medicare and a tax on all medical devices.
  Capital gains taxes have increased by nearly 50% which stymies investment, and the marginal tax rate has increased to 39.6% from 35%.
  Dodd-Frank has imposed over an additional 300 rules and regulations on banks and the shadow banking industry.
  As a result of excessive regulation, we have seen the strangulation of business investment because of uncertainty and costs.  We are currently in earnings season and what I find to be particularly disconcerting, is that while many businesses are beating earnings, they are falling short of revenue expectations.  What this is telling me is that while businesses are getting lean, sales are not there and they are decreasing.  At some point, business will not be able to cut any further and the bottom line will suffer.

   Given the aforementioned, I believe that we are in for a recession or continued stagnant growth just above 0.  A number of leading and coincidental indicators are down; durable goods orders (i.e., business investment), the stock market  (which causes a negative wealth effect), consumer expectations, lack of inflation, stagnant wages, and the average work week.  

  What is needed is an administration that doesn’t want to run you life, but an administration that can provide a favorable environment for business where 
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    John Tommasi is a retired Senior Lecturer of Economics & Finance from Bentley University and  the University of New Hampshire.

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