The End of the Great Recession
When the recession comes to an end, the economy is no longer falling, but is still depressed
August 3, 2009
Fred Foldvary, Ph.D.
Economist

The economic recession that began in 2007 will most likely end this year 2009. To “recede” means to fall, and a recession means a fall in national output. When the recession comes to an end, the economy is no longer falling, but is still depressed, hence in a depression. So the end of the recession does not imply the end of the depression.

The deceleration became clear with the announcement of the 2nd quarter (April to June 2009) GDP. Total output in the second quarter was $14.15 trillion, down one percent from first-quarter GDP. The first quarter 2009 GDP was down 6.4 percent from the last quarter of 2008, so there was a substantial decrease in the rate of decline.

Personal consumption fell by an annualized rate of 1.2 percent in the second quarter, with a 7.1 percent fall in durable goods such as furniture. Private investment continued its steep decline, but the fall, 20.4 percent, was less than the previous quarter’s steep decline of 50.5 percent. Residential construction fell by 29.3 percent, less than the 38.2 percent fall of the first quarter.

Exports fell by 7 percent, but they had fallen by 29.9 percent in the first quarter. The one area of growth was government. Total government spending on goods and services rose by 5.6 percent. Federal spending grew by 10.9 percent, while state and local spending grew by 2.4 percent. This increase in federal spending depends on funds borrowed from abroad, so it has been an artificial stimulus, but still an increase in goods and services.

Another measure of economic performance, gross domestic purchases, actually increased in the second quarter, in contrast to a decline in the first quarter. Also, the predictions market at www.intrade.com is betting on positive growth in the third quarter.

The rise in the U.S. stock market since March 2009 reflects the economy changing from rapidly declining to mildly declining. The economy looked bleak in fall 2008 as financial giants toppled, but the financial panic has dissipated.

However, even while the government is stimulating the economy with dubious programs such as cash-for-clunkers, giving away up to $4500 to exchange an old car for a new one, the federal government is also threatening to impose the anti-stimulus of sharply higher taxes.

The temporary tax cuts enacted at the beginning of the ozo decade (2000-2009) are scheduled to expire in January 2011. Congress will most likely let the tax rates on higher incomes rise back up. The passage of a federal medical services program will impose higher costs on business, and the cap-and-trade program being considered amounts to a stiff tax on enterprise. The federal minimum wage already increased in July 2009.

The increases in taxes and other imposed costs could delay and slow the recovery, and if high enough, could plunge the economy into a second recession, a W-shaped double dip. It is very foolish to impose higher taxes and costs on enterprise during a recession. Thus while the federal government spends trillions of dollars in wasteful stimulus programs, it is whacking down the economy with the threat of the largest tax increases in U.S. history. This split-personality policy can be explained by asking the question, who is gaining the most from government?

Workers are not gaining. They get high taxes, high unemployment, and insecurity. Investors sometimes gain and sometimes lose, but the odds get stacked against them from economic turbulence, high taxes, restrictive investment rules, and the failure of government to prevent fraud. The big gainers are the landed interests and their financial allies in banking and insurance. Governments have gone all-out to bail out the financial firms that financed the real estate bubble. Evidence of their gains are the big bonuses distributed to the financiers.

The permits and the higher costs of forced medical services will be partly passed on to consumers and partly borne by reduced enterprise and less growth. The ironic economic joke is that most of taxation is really on land rent. Entrepreneurs bid less for land when their business gets highly taxed. What would have been paid in rent instead goes to pay explicit and implicit taxes. But by taxing land rent indirectly, while also taxing wages and capital yields, government imposes a second tax, the deadweight loss of wasted resources.

Pollution should indeed be curbed, but it should be done with a “green tax shift,” with pollution taxes offset by lower taxes on wages and capital. Medical expenses should be untied from employment. We can greatly lower medical costs if government stops subsidizing fat, white flour, sugar, and toxic food.

Welfare statists think that government can impose higher taxes on the rich, who don’t “need” all that money and who can afford to pay more. But the rich do not become wealthy by not caring about money. The higher taxes that do not distinguish between wealth that comes from nature and wealth that comes from human action will reduce enterprise and investment.

Mother nature is willing to pay all the expenses of government, yet people shun her offer and instead inflict costs on human action. Even most economists seek to punish production while letting Mother Nature’s gifts go to the landed elites. This is history’s greatest mystery.

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Fred Foldvary, Ph.D.
Economist

FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for Progress.org since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.