Our Economic Council.

This being an election year, a great deal of bloviating is going on about economic issues.  The problem is, most people – at a rough guess I’d say 98% – don’t understand economics very well.  Well over half don’t know their butts from their faces about economics.  That is, to some extent, understandable; it’s not taught in the schools, and most people don’t get any in college.  I have studied it, partly because several micro- and macro-economics courses were required for my MBA, and partly because I find it interesting.  I’ve read economics works ranging from Smith to Keynes to Von Mises to Marx to Friedman to Sowell, and have come out of it with probably a better-than-average grasp of how economies work, and as an adherent to the Austrian school.

Doing the Math.

This year’s election is centering pretty firmly on economic issues.  That’s partly because the economy isn’t doing very well.  Europe is swirling around the fiscal drain, and recent elections in France and Greece appear to be putting the lunatics in charge of the asylum – sort of like California did in 2010.  Here in the States, political pundits of every stripe are arguing whether or not the recession of 2008 was or was not worse than the recession of 1979 – 1980.  So, which was worse?

Unlike a good portion of today’s electorate, I remember the 1979-1980 recession, but my memories are no doubt tinged with the fact that I was young and, like many young people, chronically short of cash.  So, instead of relying

The Seventies weren't easy times, but there were compensations, such as the increase in the Redhead Index.

on my perceptions, let’s do the economics thing and look at the numbers.

A common indicator used by economists is the Misery Index, which is derived by adding the unemployment rate to the inflation rate.  In 1980, at the end of the Carter Administration, that index stood at 19.72.  In the fall of 2008, it was 7.49.  (Sources:  U.S. Department of Labor, InflationData.com)  Note that the most recent data available, for March 2012, gives the Misery Index as 10.85.

Using this standard, 1980′s recession was worse.

Let’s look at unemployment rates alone.  In the fall of 1980, the unemployment rate was 7.2%.  In the fall of 2008, that rate was likewise 7.2%.

Using this standard, both recessions were pretty much equal.  The recoveries were not, but we’ll go into that later.

Are we underwater yet?

Next, let’s look at the inflation rate.  This is what drives the big difference in the Misery Index; in the fall of 1980, the inflation rate was 12.5%.  In the fall of 2008, it was 0.1%.

Using this standard, the 1980 recession was far worse.  Inflation did begin to peg after the 2008 election and has taken off again; again, we’ll go into that later.

Now, interest rates:  In the fall of 1980, the prime interest rate was 20.35%.  (!)  In the fall of 2008, that rate was 4%.  (Source:  Federalreserve.gov)

Using this standard, the 1980 recession was far, far worse.

A brighter picture?

So, what happened after the 1980 and 2008 elections?

Neither Ronald Reagan nor Barack Obama reacted to the economic problems perfectly. The Reagan Administration’s response was primarily based on the Austrian model, although spending and debt increased at a far higher rate than was prudent.  The Obama Administration used a Keynesian model, and Federal spending has, to put it bluntly, skyrocketed, while debt has increased to exceed GDP for the first time in peacetime.

At this point in the first term of the Reagan Administration, the Misery Index had dropped from 19.72 to 11.81, a drop of 7.91.  Today, the Misery Index stands at 10.85, as noted above; that’s an increase from 7.49, an increase of 4.32.  That has actually dropped from a high of 12.87 in August of 2011.

What is shocking about the present situation is the explosion in Federal debt, an inherently inflationary index.  The chart here only presents data through the end of 2011; the picture has gotten worse since then, and current projections of Federal spending show this disaster becoming a calamity.

What can be done?  Historically, no matter what marginal tax rates are in place, tax revenues never rise much above 18-19% of GDP.  That’s a historical hard cap.  The best way out of this is to grow our way out of it, but at present every policy of the Imperial Federal government, from tax

Looking ahead.

policy to energy policy, seems determined to drive business out of the country.

But that’s a subject for another post.

So, in summary:  By any objective economic standard, when Ronald Reagan took office in 1980, he faced an economic situation more dire than the one Barack Obama faced in 2008.  Reagan’s response was not perfect; spending increased, as did debt.  But the marginal tax rates decreased and the tax code was simplified, broadening and flattening the tax base, and this resulted in an increase in Federal revenues; the problem was, all of that was spent and more.  The Austrian model produced a far stronger recovery than did the Keynesian model.

The current Administration has doubled and tripled down on the spending side while doing nothing about our horrendous tax policy.  That needs to change, and soon.