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Scholarly Response: “It’s Hard to Put a Happy Face on This Recovery”

Debaters on ABC's This Week

On Sunday, April 29, the Miller Center partnered with ABC’s “This Week with George Stephanopoulos” on the second of six special episodes examining some of the key issues heading into the 2012 Election.  On Sunday, six distinguished panelists discussed and debated whether or not America’s economic recovery is “built to last.” Today’s guest post is from historian Brian Domitrovic offering his assessment of the arguments presented in the debate.

Paul Krugman said some misleading things in this debate. “This is not especially worse than the recovery from the 2001 recession,” for example. And, “If you actually just look at the job gains, or lack thereof, they’re more or less on track.”

This is a fallacious comparison. The recession of 2001 was notably mild compared to the severe recession of 2008-2009. Therefore, job growth should be much stronger following the latter than following the former recession.

Here are the numbers. Peak-to-trough, in 2001-2002, the United States lost 2.1 million jobs. Twenty-one months after the trough (of January 2002), the pre-recession jobs level was surpassed for good. When George W. Bush was running for re-election in April 2004, 600,000 more persons had jobs than when he had taken office in January 2001, which was before the recession had even started.

Peak-to-trough, in 2008-2009, the United States lost 8.2 million jobs, and the pre-recession level of employment has not been surpassed to date. As Barack Obama runs for re-election in April 2012, there is marginally less employment than when he took office in January 2009, which was near the depth of the recession.

In other words, the recovery from the 2001-2002 recession was attained by 2004, whereas the recovery of the 2008-2009 recession remains unachieved. And this is not even to note that the recovery from the 2001-2002 recession was itself mild. The 2001-2004 achievement represents a low standard, and Obama’s economy cannot bring itself to match it.

Krugman also said, in response to Carly Fiorina’s point that the United States has exceptionally high corporate taxes, that “nothing you said about business taxes is true….If you look at the actual tax collections in the United States on business, they’re lower than other advanced countries.”

The problem here is that both are right—and this reality vindicates Fiorina but not Krugman. U.S. corporate tax rates are the highest in the world, but tax receipts are among the lowest. The lesson here, of course, is that high rates on businesses have caused an epidemic of tax avoidance. Lowering the rates will make it more economical for firms to represent revenue as income subject to taxation, and in turn, receipts will rise.

Krugman must, however, be given credit for his remark implying that the Social Security problem is largely one of economic growth. With robust economic growth, the financing of Social Security will be far easier than under our current sluggish pace.

Eric Schmidt made a highly notable remark when he said that “the right thing to do is to get people employed in jobs that matter….And how do you do that? It’s largely done by the private sector, largely with intelligent regulation and not too much of it.”

This, of course, goes against the grain of the entire thrust of regulatory policy since the first response to the Great Recession. Indeed, in the Dodd-Frank bill, the country got a carpet of regulations—on the banking sector—unprecedented in the post-New Deal era. If Schmidt is correct—and surely he is—one should look at the expansion of the regulatory state since 2008 as a major culprit in the slow recovery, particularly with respect to employment.

The Jennifer Granholm position that the auto bailouts of 2008 and 2009 saved the industry met a credible challenge from George Will, who noted that bankruptcy proceedings could have just as easily—perhaps better—rearranged the assets of the American automotive industry. One point from the finance literature: Michal Jensen of Harvard Business School showed years ago that General Motors has the worst record of any company in terms of return on investment in its core operations. It was a verity of the literature, at the time of the bailouts, that the American automakers can not handle their capital, and all the bailouts did was give them more.

An old rule of thumb is that you fight recessions by guaranteeing the value of the currency while cutting taxes and regulations. The former gets people confident about the means of exchange, and the latter gives them something productive to do with their money. We’ve done rather the opposite these past four years our great crisis. It should not surprise us that we’re stuck with mediocre results.

Brian Domitrovic chairs the history department at Sam Houston State, writes weekly for forbes.com, and is author of Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity.

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