Here comes the double-dip recession

Dick Morris's picture

The drop in the stock market (now about 1,000 points on the Dow) is a graphic indication of the stark fact that we are entering the infamous double dip of the recession, long feared and predicted. The economy is not in a V after all (down and then up) but in a W (down, up, down again and then, finally, up). And the cause of the second dip is not the recession itself, but the cure administered to it by President Obama and the Democratic Congress.

Consider the indications (data provided by New America Foundation, analysis by Sherle R. Schwanninger and Samuel Sherraden):

— Gross domestic product growth has only been 2.2 percent, 5.6 percent and 3.2 percent for each of the last three quarters, well below the rebounds typical in past recessions.

— Total civilian employment has rebounded by only 1 percent since the depth of the unemployment five months ago. In 1973, at a comparable point, it had rebounded by 7 percent. In 1981, by 8 percent. In 1990, by 4 percent. And in 2001, by 3 percent. U-6, the broadest measure of unemployment, stands at 17.1 percent

— Housing prices have dropped by 30 percent since 2006, and “many economists expect housing prices to decline at least another 10 percent,” according to Schwanninger and Sherraden.

— While corporate profits are 30.6 percent higher than one year ago, wages are up by only 1.6 percent, less than half their rate of increase two years ago.

— Financial sector profits make up 35.7 percent of all domestic corporate profits. These gains are driven by trading revenue, which does not reflect real economic growth. Schwanninger and Sherraden report, “In the first quarter of 2010, Goldman Sachs, Morgan Stanley and Bank of America earned 72 percent, 45 percent and 16 percent of their net revenue (respectively) from trading profits.”

— Personal savings dropped from a high of almost 6 percent to 2.7 percent in March, 2010, so households have cut their debt by just $300 billion since it peaked in 2008. So household debt, which rose from 60 percent of GDP in 1990 to almost 100 percent in 2008, has only dropped to 97 percent. It has a long, long way to go before it goes down enough to free consumers to spend more.

— Meanwhile, retail sales have averaged only a 1.7 percent increase over the past three quarters, half of which was merely to restock inventories. Schwanninger and Sherraden note that “in a typical recovery, the rebound is closer to 3.5 percent.” And most of that increase is due to expanding government cash transfer payments, which now make up 18.3 percent of personal income. “Excluding transfer payments, personal income increased just 0.3 percent since the third quarter of 2009.”

— And stimulus spending, which has failed to generate private sector growth, is now winding down. Only 43 percent of the tax benefits and entitlement spending remain to be doled out, as does 63 percent of the contracts, grants and loans in the stimulus package.

— The strengthening of the dollar due to the collapse of the euro will dry up U.S. export trade. Exports to EU nations account for 21 percent of American and 20 percent of Chinese exports. Schwanninger and Sherraden note that “a European slowdown will reduce demand for the two primary engines of world economic growth.”

But this second downturn in the economy will be accompanied by inflation, making it worse than the first recession. With interest rates set to rise (because the fed is no longer massively purchasing securities to keep them down), taxes set to go up (because of Obama’s ideology) and global energy use about to increase, sending prices higher (because the rest of the world is recovering), prices have to go up. But with no growth in real personal income and household credit close to all-time highs, there is not enough demand to pay the higher prices, so a deeper slump will ensue.

The solution? Cut — don’t raise — taxes. And bring down the deficit through massive spending cuts. Reduce our borrowing needs by slashing our spending. Free up capital to feed job growth.

It should be evident to all that Obamanomics is a disaster. It reminds one of nothing so much as the Medieval practice of bleeding the patient to make him well by expelling the evil spirits that dwelt within. When the patient did not recover, they just bled him more and, when he died, they just said that the spirits killed him. The practice of spending, borrowing and then taxing to fuel job growth is the modern analogy.

[Dick Morris, former political consultant and pollster, writes a nationally syndicated political column and provides commentary for Fox News.] COPYRIGHT 2010 DICK MORRIS AND EILEEN MCGANN; DISTRIBUTED BY CREATORS.COM

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