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Why Sluggish Recovery Is the Real Problem, Not Recession

Food Line

Neil Shah of the Wall Street Journal recently published an article analyzing Census data gathered by demographer William Frey from the Brookings Institution. Frey reports that the U.S. population grew by the weakest rate of growth since after the Great Depression (1937), having grown only 0.72 percent between July 2012 and July 2013.

U.S. population has been consistently falling since the Great Recession. As noted by Frey, Americans are still enduring the aftermath of the recession, which has led to “diminished immigration, low fertility and below-normal movement across state lines to prosperous areas.”

But why are we still feeling the effects of a recession that supposedly ended four years ago—in a way as personal as deciding whether or not to add to one’s family?

Empirically, these periods were not necessarily the worst in history—compare them with the 1920-21 depression and the early 1980s recession, for example. The difference lies in the wakes of the depression and recession, not within the depression and recession themselves. Both were the worst recoveries in U.S. history.

After the crash of 1929, Herbert Hoover’s Keynesian policies in the early 1930s rendered annual budget deficits that funded public works projects, such as the Hoover Dam. The Reconstruction Finance Corporation (RFC) was also created, in which $1 billion was injected into banks that were “too big to fail”, after making faulty loans during the roaring twenties. In one year, Hoover raised the top income tax rate to 63 percent in 1933 from 25 percent in 1932, in order to fund the budget deficit.

Conversely, in response to the 1920-21 depression, federal spending was cut dramatically over a period of three years, from $18.5 billion in 1919 to $3.3 billion by 1922. All the while, Treasury Secretary Andrew Mellon, Warren Harding, and Calvin Coolidge instated the Revenue Acts of 1921, 1924 and 1926, sharply cutting the top marginal tax rate to 58 percent, 46 percent and 25 percent respectively; the top rate fell from 73 percent in 1921 to 24 percent by 1929.

While—based on what we know (data on the topic was not reliably kept until 1948)—the unemployment rate in 1921 peaked at 11.7 percent, it dropped to 2.4 percent by 1923; in the early 1930s, the unemployment rate continually increased, averaging 25 percent in 1933.

The frivolous fiscal spending, tax hikes and cumbersome regulations of the 1930s led to the least prosperous decade in U.S. history. On the other hand, annual budget surpluses, tax cuts and deregulation of the 1920s led to—what many would call—the most prosperous decade in U.S. history, despite both having come from depressions similar in severity.

[pullquote]    The economy is still over 12 million jobs below its potential, four years after the start of the recovery.[/pullquote]

Moreover, as Ronald Reagan inherited the double-dip recession of 1980 and 1981, he responded by accomplishing tax reform with a divided Congress. The top marginal tax rate was decreased from 70 percent to 50 percent in 1981, and lowered again to 28.5 percent by 1986. Over this five-year period, known as the “Reagan Recovery,” 7.8 million jobs were created, and real median household income rose by 7.7 percent or $3,800.

President Obama responded to his inherited recession with unprecedented levels of spending, tax increases (Obamacare being the largest in history at $512 billion) and spikes in government regulation. According to Sentier research, four years after the start of the recovery in 2009, real median household income fell by 4.4 percent or $2,900. Since the start of the recession and when President Obama took office, median household income has fallen by 6.1 percent or $4,300, which is below the December 2007 level.

Furthermore, the ratio of employment to population, E-Pop, which hovered at 63 percent for two decades, plunged 4.5 percent during the recession, and has since remained stagnant between 58 percent and 59 percent, according to the Bureau of Labor Statistics. Therefore, the economy is still over 12 million jobs below its potential, four years after the start of the recovery, despite a deceiving unemployment rate that has tapered to 7.3 percent (still above the Fed’s target).

As indicative of the findings above, “Reaganomics” supports reductions in the growth of government spending, tax rates and government regulation, much like the policies of Harding and Coolidge. “Obamanomics” advocates for increases in the growth of government spending, tax rates and regulation, much like the policies of Hoover and FDR.

Which approach has led to more successful recoveries? The data speaks for itself.

Given the fall in household incomes, a job market severely below its potential, tax hikes and an unfriendly business environment, it is no wonder the U.S. population growth rate has fallen to historic lows, suspiciously in line with that of 1937.