The Final Nail in the Democrats' Coffin

By Lawrence Kudlow (Archive) · Saturday, October 30, 2010

On the eve of the midterm elections, a third-quarter gross domestic product report showing a meager 2 percent growth rate is the final nail in the Obama Democrats' political coffin.

The economic nails slowly have been hammered into that coffin all summer and fall. A spate of sub-par economic statistics has shown the failure of the fiscal-stimulus spending program. And myriad tax and regulatory threats produced by new government policies have created a massive uncertainty overhang and a dismal jobs outlook. American businesses have gone on an investment-capital and hiring strike.

For a White House that bet the ranch on a massive government pump-priming plan, it all has turned out to be a complete failure. The scheduled economic recovery has simply not occurred.

And that's why a Republican/tea party tsunami lies just over the horizon. That tidal wave could be even greater than current polling suggests.

It should have been recovery summer, according to the president and his followers. But it is now officially a recovery slump. The entire command-and-control economic philosophy of the Obama Democrats has proved to be a big bust. And they'll pay a very big price for this.

In fact, the past two GDP reports have averaged less than 2 percent growth, something that qualifies as a growth recession, not a recovery.

Even worse, the GDP deflator -- the broadest inflation measure -- came in at 2.2 percent in the third quarter, following a 2 percent reading in the second quarter. That means inflation is rising faster than real output. Stagflation.

The Bernanke Fed should take notice of this on the eve of its quantitative-easing pump-priming exercise, expected to be announced the day after the elections. We are actually experiencing a mini version of a stagflationary growth recession.

The spending, taxing and regulating policies of the Democratic Congress and administration have blocked growth, putting the Fed in a position to provide even more money to chase fewer goods. But in classic Milton Friedman terms, even though the economy is mired in stagnation, that's still an inflationary prescription.

On top of all that, the depreciating-dollar policies of the Fed have led to a boom in commodity prices, including food and energy -- things ordinary Americans pay for in the course of their typical week.

When the economy came in at 5 percent in the last quarter of 2009 -- and at 3.7 percent in early 2010 -- it looked like a recovery scenario. This, of course, followed the Fed's massive $2 trillion stimulus plan and the $868 billion fiscal stimulus. But those sugar highs quickly evaporated as growth slowed to 1.7 percent in the spring and 2 percent in the summer.

Meanwhile, a stubbornly high unemployment rate of 9.6 percent was supposed to have dropped to 8 percent last year and 7 percent by the end of this year, according to the president's Council of Economic Advisers. But it didn't. The so-called stimulus failed to stimulate.

Actually, unemployment is much worse for regular workaday folks. Counting marginal part-time workers and discouraged workers, unemployment is 17.3 percent. And this year, though the president promised 1.5 million new jobs, non-farm payrolls have grown by only 613,000 and actually have fallen over the past four months.

The trouble with the whole Obama mindset is the notion that government can run the economy. That idea has failed. It is business that runs the economy, including entrepreneurs and risk takers. Yet the animal spirits have been stifled, while the producers have been laughed at, mocked and insulted.

The Obama class-warfare campaign against business and investment has created a wall of worry and a refusal to invest in the future. The incentive model of growth has been discarded by Obama's extreme left-liberal Keynesianism. Predictably, higher costs -- including the cost of Obamacare, probably the single greatest barrier to growth and jobs -- have forced the most productive factors in the economy to hole up and virtually shut down.

But the whole tea party movement of free market populism represents an attempt to re-oxygenate the economy by unclogging the blood vessels of entrepreneurship with a major rollback of spending, taxing and regulating. This tea party philosophy is derided daily by the Democrats, but it represents a bull's-eye in terms of creating future economic growth.

Fortunately, the Republican Party has returned to this Reaganesque message. This is the single most important theme in the GOP comeback.

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