{"id":15531,"date":"2017-02-07T14:06:11","date_gmt":"2017-02-07T19:06:11","guid":{"rendered":"http:\/\/www.megalextoria.com\/wordpress\/?p=15531"},"modified":"2018-11-25T15:21:17","modified_gmt":"2018-11-25T20:21:17","slug":"the-bad-idea-behind-our-sluggish-recovery","status":"publish","type":"post","link":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/2017\/02\/07\/the-bad-idea-behind-our-sluggish-recovery\/","title":{"rendered":"The Bad Idea behind Our Sluggish Recovery"},"content":{"rendered":"

\"\"<\/a><\/h2>\n

The Bad Idea behind Our Sluggish Recovery<\/h2>\n

\u201cI actually compare our economic performance to how, historically, countries that have wrenching financial crises perform. By that measure, we probably managed this better than any large economy on Earth in modern history.\u201d \u2013 President Obama<\/p><\/blockquote>\n

So say defenders of the sluggish recovery. But recent research belies that idea. The truth is that our lackluster growth is the result of neglecting an essential economic concept.<\/p>\n

According to Just Facts Daily<\/a>, \u201ceven after the recession ended in\u00a02009 average real GDP growth has been\u00a035% below\u00a0the average from 1960\u20132009, a period that includes\u00a0eight recessions.\u201d Moreover,<\/p>\n

In early 2011, the White House Office of Management & Budget projected that real GDP would grow by an average of 3.6% per year for five years after the Great Recession (see\u00a0pages 14\u201316). Obama\u2019s economists noted that this figure was lower than the typical post-recession growth rate of 4.2%, but they concluded that the \u201clingering effects from the credit crisis may limit the pace of the recovery,\u201d even though the recession left \u201cenormous room for growth in 2011.\u201d Ultimately, GDP grew by an average of\u00a02.2%, or 39% below the White House\u2019s conservative estimate.<\/p><\/blockquote>\n

Despite these unmet forecasts, some insist that recoveries from financial crises are inherently slower. \u00a0While previous economic research by Carmen Reinhart and Kenneth Rogoff<\/a> appeared to affirm that notion, a subsequent study has shown it doesn\u2019t withstand scrutiny.<\/p>\n

Harvard economists Robert Barro and Jin Tao recently conducted<\/a> a major study of 185 economic contractions of at least 10 percent of GDP in 42 countries, including \u201cfinancial crises such as the Great Depression of the 1930s.\u201d They found that<\/p>\n

On average, during a recovery, an economy recoups about half the GDP lost during the downturn. The recovery is typically quick, with an average duration around two years. For example, a 4% decline in per capita GDP during a contraction predicts subsequent recovery of 2%, implying 1% per year higher growth than normal during the recovery. Hence, the growth rate of U.S. per capita GDP from 2009 to 2011 should have been around 3% per year, rather than the 1.5% that materialized.<\/p>\n

Arguing that the recovery has been weak because the downturn was severe or coincided with a major financial crisis conflicts with the evidence, which shows that a larger decline predicts a stronger recovery.<\/p><\/blockquote>\n

So why hasn\u2019t this recovery been stronger? The predominant explanation blames inadequate stimulus spending. It holds that more \u201cdemand\u201d is needed to boost the economy. But this inverts the nature of the relationship between demand and economic performance. Demand is the result\u2014not the cause\u2014of economic activity. Therefore production, not demand, determines growth. At best, trying to stimulate demand while ignoring production is like trying to grow a flower by watering its petals instead of its roots.<\/p>\n

But it\u2019s often worse than that. The state can spend only what the private sector produces, which means government must first remove a dollar from the economy to spend it into the economy. Because doing so misallocates resources, the net effect is worse than zero: Rather than merely neglecting the flower\u2019s roots, it\u2019s like sucking water out of the soil and pouring it over the flower\u2019s petals. Small wonder the economy has failed to break even three percent growth rates.<\/p>\n

This basic insight was once universally understood. Writing in his \u201cfourth proposition,\u201d for instance, John Stuart Mill explained that \u201cthe demand for commodities is not the demand for labor\u201d\u2014or, as economist Steven Kates clarifies<\/a>, \u201cwhen you buy goods and services you are not increasing the number of jobs.\u201d That\u2019s because the payment of wages precedes the production and sale of a good or service. \u201cThe employment of labor is an entrepreneurial decision made in advance of production and sale. It is not the consequence of someone having finally bought the product,\u201d stresses Kates. Only productive activity creates economic growth.<\/p>\n

While failing to grasp this concept was once considered the sign of a bad economist, today it is almost totally disregarded. That\u2019s because the economist responsible for our abandoning this truth\u2014John Maynard Keynes\u2014although he never refuted it, he successfully invented and repudiated a mischaracterized version of it<\/a> so that subsequent generations have been convinced of its error.<\/p>\n

But the truth is it remains as valid today as ever. And until our policies reaffirm it we shouldn\u2019t be surprised to witness suboptimal economic growth rates and a weaker economy.<\/p>\n


\nDavid Weinberger
\n<\/a><\/h5>\n

David Weinberger formerly worked for The Heritage Foundation. He currently blogs at <\/span>diversityofideas.blogspot.com<\/span><\/a>.<\/span><\/p>\n

This article was originally published on FEE.org. Read the original article<\/a>.<\/p>\n

\"\"<\/p>\n","protected":false},"excerpt":{"rendered":"

The Bad Idea behind Our Sluggish Recovery \u201cI actually compare our economic performance to how, historically, countries that have wrenching financial crises perform. By that measure, we probably managed this better than any large economy on Earth in modern history.\u201d \u2013 President Obama So say defenders of the sluggish recovery. But recent research belies that idea. The truth is that our lackluster growth is the result of neglecting an essential economic concept. According to Just Facts Daily, \u201ceven after the recession ended in\u00a02009 average real GDP growth has been\u00a035% below\u00a0the average from 1960\u20132009, a period that includes\u00a0eight recessions.\u201d Moreover, In early 2011, the White House Office of Management & Budget projected that real GDP would grow by an average of 3.6% per year for five years after the Great Recession (see\u00a0pages 14\u201316). Obama\u2019s economists noted that this figure was lower than the typical post-recession growth rate of 4.2%, but they concluded that the \u201clingering effects from the credit crisis may limit the pace of the recovery,\u201d even though the recession left \u201cenormous room for growth in 2011.\u201d Ultimately, GDP grew by an average of\u00a02.2%, or 39% below the White House\u2019s conservative estimate. Despite these unmet forecasts, some insist that recoveries […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[623,2415],"class_list":["post-15531","post","type-post","status-publish","format-standard","hentry","category-news-and-politics","tag-economy","tag-recession"],"_links":{"self":[{"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/posts\/15531","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/comments?post=15531"}],"version-history":[{"count":0,"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/posts\/15531\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/media?parent=15531"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/categories?post=15531"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/wp-json\/wp\/v2\/tags?post=15531"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}