Edward Lazear has an article in the June 14, 2012 edition of
the Wall Street Journal. It came under the title: “Whose Fault Is Today's Bad
Economy?” and the subtitle: “What we're experiencing is a new wave of slowdowns,
not a continuation of past problems.” He uses the analogy of baseball to
demonstrate that the game was lost because pitcher Smith gave up five runs in
the sixth inning, and not because the team was down by three runs when he
entered the game in the fourth inning. Well, I shall return to this analogy in
a moment but after I discuss the concept of the baseline which is something
that escapes many people.
However, I need to mention another point first, one that is
probably familiar to most people. It is that an economy goes in cycles. When
you look at a chart displaying its performance, you see it go up and down. And
while it does that, the trend can be generally upward which would indicate that
the economy is expanding, or it can be generally downward which would indicate
that the economy is taking a breather. What counts, therefore, is not the
momentary fluctuations of the normal business cycle but the general trend of
the economy. And the numbers indicate that having registered an expansion of as
much as 4 percent, the American economy has slackened to the level of 2 percent
positive growth where it is taking a breather. Lazear calls this a new wave of
slowdowns but the chances are that he is wrong.
I now discuss the concept of the baseline by giving an
example from real life. I used to work in a place when the union was
negotiating a new 3 year contract with the employer. There came a point when
the membership was asked to choose between the inclusion of a Cost Of Living
Allowance (COLA) clause in the contract or accepting a higher salary at the
start. A large number of people argued for the COLA because they saw it as
quarterly raises even though they were limited to a maximum of 1% per quarter
irrespective of the actual rise in inflation. But a number of us preferred the
one time higher salary at the start because it amounted to 5%. After long
discussions, we convinced the other camp that our choice was better because to
raise the baseline by 5% at the start meant that we shall maintain this raise
during all the quarters and all the years ahead. Yes, it was only a one-time
shot, but that was a baseline that will be maintained and built on during the
life of the contract.
Thus, you must never overlook what happens to the baseline
when you study the chart of an economic performance whether you are looking at
a baseline that rises or one that declines. Now, the classical definition of a
recession is having two consecutive quarters of negative growth (decline) in
the GDP. Most of the time, this would be a decline ranging from a fraction of a
point to a full percentage point. Therefore, when the recovery begins, the new
baseline is at most 1 percentage point below the current “flat line.” Given
that the average recovery registers about 4.5 percent positive growth, you
deduce that the magnitude of the average recovery is 5.5 percentage points
higher than the new baseline.
Let us now look at the numbers since Barack Obama took
office. What happened to the economy is that it was hit with a recession which
took it down by as much as 7 percent; and this ought to be the new baseline
from where to judge the magnitude of the recovery. It came at 4 percent above
the old baseline, and this puts it at 11 percent above the new baseline --
which is what counts. By any measurement, this is a roaring recovery. Yes, it
has slackened a bit to 9 percent during the month of May, but this is only due
to the normal business cycle, and is not a wave of slowdowns like says Lazear. In
any case, we now see that his baseball analogy is not adequate because it does
not take into account the movement of the baseline, a concept that is common in
business and economics.
The upward trend should continue unless something unexpected
happens which is always possible given the current state of the world scene,
and the fact that somebody in America swore to make Barack Obama a one term
president. Thus, what these people have done is indicate their willingness to
sabotage the economy and inflict untold misery on the American people just to
fulfill a diabolic promise. The public should call them on that.
Edward Lazear has asked: “Whose fault is today's bad
economy?” And the answer is that today's economy is not bad considering what
happened to it 4 years ago. There is no fault that can be attributed to someone
but if some people insist on finding someone to crucify for the fact that the
economy has experienced an accident, they should look to a period that goes
back 4 years or more.
Barack Obama was not President then.