The report that the GDP rose at an annual rate of only one-tenth of one percent during the first quarter of 2014 was a shock to all economists notwithstanding that it was triggered in part by the horrible winter of 2013-14. Although the low growth rate might have been the result of an unusual combination of factors and is unlikely to be repeated, the slow rate of recovery during the first five years of the Obama administration is surprising given the enormous debt-financed expenditures of the federal government and the billions of dollars injected into the economy by the Fed's quantitative easing policy.
It is not too early to declare Keynesianism dead. Keynes himself would long ago have agreed with that conclusion given the swift recovery from the post-World War II recession, which was led by a booming private sector and an abrupt decline in government expenditures.
Given that a recovery from the Great Recession ought to have been given the highest priority, the federal government wasted enormous resources in 2009's $830 billion American Recovery and Reconstruction Act. Almost all of the expenditures were transfer payments and had as little effect as the Bush and Obama direct rebates to taxpayers did in 2008 and early 2009. As the administration reported, “the stimulus was fairly well divided among different types of relief. The biggest portion was public investment — those included the ‘shovel-ready' infrastructure projects and longer-term investments in green energy, broadband and the like. More than a quarter of the stimulus went to tax cuts, one-fifth went to helping states plug their own huge fiscal holes and 15 percent went to bolster the safety net.”
As the president himself later reported, there were very few “shovel-ready” projects. The rest was “pork.”
The only government industrial stimulus that created some temporary jobs was the inefficient wind and solar energy projects, which had the negative effect, and still does, of increasing energy prices as well as saddling the federal government with huge unproductive debt. On balance, they contributed little or nothing to the recovery.
The federal government not only subsidized the manufacture of hybrid and electric vehicles but gave tax credits to their rich buyers to induce them to buy the vehicles. A myriad of subsidies for solar panels, business and home insulation, created some jobs but added to the federal budget deficit. Repayment of the debt will cost jobs.
The Obama administration pursued during the entire five-year period several policies that actually discouraged recovery:
• the wind and solar programs described above, and anti-fossil fuel policies in the name of combatting global warming
• the closing of cost-efficient coal-fueled electric generating plants in spite of the great reduction in carbon emissions by those plants over the past five decades, forcing thousands of coal miners out of jobs.
• raising the cost of motor vehicles and everything else by countless regulations
• pursuing a policy of free trade when our principal trading partners, including China, Korea and others, were imposing all sorts of barriers to imports from the United States, subsidizing exports and manipulating their foreign exchange rates. Even a free-trader like Paul Krugman, a Nobel prizewinner, advocated a 25 percent tariff on imports from China in retaliation.
• Raising the minimum wage, which amounts to a tax on unemployed teenagers, blacks, Latinos and other disadvantaged groups with very high unemployment rates.
• Enacting ObamaCare, which, by raising the cost of health insurance, acts like a tax increase and discourages private business investment.
Whatever merit these measures had, they did little to create employment and indeed cost American workers millions of jobs.
So what stemmed the declining economy, and what is causing the recovery?
First, under George W. Bush, the banking system was stabilized by Treasury Secretary Henry Paulson's rescue of the banks and other financial institutions by a billion-dollar support for dubious financial assets like sub-prime mortgages.
Second, the private sector, in spite of government obstacles such as its addiction to environmental foolishness, has not rolled over and played dead. Private investment has not been extinguished. Texas and some other states — mostly Republican-led — have pro-private sector policies that attract industry and are thriving.
Third is the shale-oil and natural gas boom, which has driven unemployment down in states ranging from North Dakota and Pennsylvania to Texas. The boom occurred in spite of being hampered by the Democrat administration's kow-towing to its enviro-crazy supporters. (Thank goodness that Allegheny County Council approved drilling at the airport and some county parks in spite of the latter's protests.) What has been feeding the recovery is the innovation and productivity of the private sector. The only things holding back a full recovery are the negative effects of the Obama administration's Keynesian, health and environmental policies.