Monday, March 4, 2013

Are We Heading Towards Another Recession?

It is hard to tell, but I have believed all along that Obama’s “government trickle-down economics” would accomplish one thing – put us in another recession. The latest data from the Bureau of Economic Analysis indicates that the economy shrunk in the fourth quarter of 2012 by 0.1%. Whenever there are two consecutive quarters of negative GDP growth most economists agree this means the U.S. is in a recession. However, Democrats argue there are simple explanations for the negative GDP growth this past quarter.

First, they blame Hurricane Sandy for the slow growth. However, if the response to Sandy was so great then how could it also be partly to blame for slowing the economy? Democrats can’t have it both ways. Besides, destruction by a storm may close some businesses, but at the same time it expands other businesses. Secondly, Democrats blame cuts in defense spending. But this is exactly what Democrats want to do – cut defense spending. And Democrats use the argument that cutting entitlement spending would also slow economic growth. That may be true, but there is a big difference between 20% cuts to defense spending and 20% cuts to entitlement spending. Defense cuts would slow the economy further because military spending is used to make products and build businesses. Entitlement spending merely goes to individuals and money is not used to make products or build businesses to further grow the economy. And while entitlement cuts made across the country will nullify its effects on businesses, defense cuts are precise and devastate specific companies and its employees. Thirdly, as expected the White House blamed Republicans for the bad GDP numbers. But if the economy recovers we know Democrats will take all the credit. Once again Democrats want to have it both ways. Finally, there was slowdown in business inventories.

Yet, there are reasons to still be optimistic. First, consumer spending is up and that is critical. Many economists believe this trend will lead to better first and second quarter economic growth numbers this year. But there are reasons to cautious and skeptical about these numbers since consumer confidence plunged in January and it is important to see what effects the payroll tax increase of 2% (for Social Security) will have on consumer spending. Secondly, the economy continues to add jobs, but unfortunately the unemployment rate is already at recession levels because the job growth is slow and barely keeping up with population growth.

One could easily argue that with unemployment still at 7.8% and the economy growing at a pace much slower than 3% for four years means the economy still has not recovered or we are still in a recession. Think about it, over the past 4 years the government has poured 2 trillion dollars into the economy (stimulus and expanded entitlement spending including unemployment benefits) and another several trillion in FED quantitative easing measures (incidentally they are buying mortgage backed securities, which are the same financial investments that got us in this mess in the first place). Yes, the government is pouring an additional 6% of GDP spending into the economy each year, yet the economy remains stagnant at best. And with this massive amount of government spending the economy should not shrinking. Why borrow money we do not have to invest in our economy if it is not working? It makes little sense.

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