Good-Bye Recession, Hello Slump
he U.S. recession officially ended in June 2009. With that, a normal post-recession boom failed to materialize. Instead, an unwelcomed slump ensued. Since the recession bowed out, the average annual GDP growth rate has been a paltry 1.6% — well below the long-run trend growth rate of 3.1%.
The economic policy prescriptions of the Obama administration — contrary to the President’s oft-repeated assertions — have failed to mitigate the damage from the Panic of 2008-09. Rather, they have kept the patient in sick bay.
The first misguided advice was peddled by the fiscalists (Keynesians) who dominate the Washington, D.C. stage. According to them, increased government spending, accompanied by fiscal deficits, stimulates the economy. That dogma doesn’t withstand factual verification.
Nothing contradicts the fiscalists’ dogma more conclusively than former President Clinton’s massive fiscal squeeze. When President Clinton took office in 1993, government expenditures were 22.1% of GDP, and when he departed in 2000, the federal government’s share of the economy had been squeezed to a low of 18.2% (see the accompanying chart and table). And that’s not all. During the final three years of the former President’s second term, the federal government was generating fiscal surpluses. President Clinton was even confident enough to boldly claim in his January 1996 State of the Union address that “the era of big government is over.”
President Clinton’s squeeze didn’t throw the economy into a slump, as Keynesianism would imply. No. President Clinton’s Victorian fiscal virtues generated a significant confidence shock, and the economy boomed.