The Obama Recession

I was listening to Sean Hannity today and he is starting to call what is happening on Wall Street Today the Obama Recession. As of this post the DOW is at about 7,550 and oil is at around $49 a bbl. The Wall Street Journal explains the problem.

...investors are watching Congress and what they mainly hear are demands to raid the Treasury's $700 billion bank rescue fund for a mortgage bailout, or an auto bailout; or promises to spend several hundred billion dollars more under the guise of "fiscal stimulus." What Americans don't hear is anything that would encourage investment or risk-taking.

No doubt many Democrats figure nothing that happens before January 20 is on their watch, so they don't need to worry. But the deeper the economic fall, the harder the road back. The world could use a signal from Mr. Obama that he favors policies to put private capital back to work, not merely to grow the government.

What the markets also hate is uncertainty. And no one is quite sure what Obama is going to do. Would you invest in an industry if it was in line for a bail out? Probably, if it was a sure thing. You would get some return on the government money. However, no one knows what the government is planning. Auto bail out? No auto bail out? Who knows? This creates uncertainty. More uncertainty than usual. Too much uncertainty and investors park their money and wait for the dust to clear.

And what about his promise to raise taxes on the rich? Well if I was rich I'd sell all my investments and get the money out of the country before the Obama administration had a chance to grab the money. And if you look at what is happening on Wall Street that is exactly what appears to be happening. The tax year closes on 31 December. Expect the market to fall further. Maybe a lot further.

So what about the Obama economic team?

The three Treasury secretaries sparred on tax and spending policies. Mr. Paulson challenged Mr. Summers on Democrats' plan to raise taxes on wealthy individuals, arguing, "I don't think we're going to find that a tax increase is helpful here" and calling for lower corporate taxes to keep U.S. businesses competitive.

Mr. Summers emphasized cutting taxes on middle-income households, noting that such cuts could help to stimulate economic growth because middle-income households are more likely to spend tax breaks than are higher-income households.

Well sure. The middle will spend. The question is: who will invest? Without investment jobs dry up and under those circumstances the spending by the middle will go into paying down debt.

Which brings us to some recent research on the subject of stimulating the economy. It discusses how FDR's policy of hampering business greatly slowed the recovery.

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

So let us see. Does Obama want to punish capital? Yep. Does he want to enhance the power of labor? Yep. He will not do it the same way FDR did at least with respect to capital. I predict the net result will be the same. Fortunately Presidents are now limited to eight year terms. So there is a limit to the damage he can do. Unless he can get a repeal of the Presidential term limit amendment. I wouldn't put it past him to try.