America's Private Sector Era is Over

Written by David Frum on Saturday October 3, 2009

The U. S. private economy continued its horrifying downward trajectory in the second quarter of the year. Private investment in everything except housing dropped 9.6%.

The great thing about the Obama administration is that it's full of former academics. Of all the world's occupations, academics are the least secretive. Not only do they make their livings telling people what they think (so do journalists!), but they are also accustomed to sharing early drafts of their work. Plus, since it's more important in academia to be interesting than to be right, they don't fret that if they speak up today, they'll have to backtrack tomorrow.

The combined effect is to make the Obama administration's mid-level officials much more open-mouthed than their Bush administration predecessors. Result: even those of us who stand on the opposite side of the ideological fence from them can learn what they are thinking.

And here it is: They think the recovery of the U. S. economy has already begun -- and that growth will return fast and strong.

Figures released Sept. 30 show that the U. S. economy shrank by only 0.7% in the second quarter. That number implies that the US economy probably hit bottom in June -and that expansion may have already resumed.
The Obama administration's plans assume that recovery will be strong. That assumption seems to make sense. Usually, the more severe the downturn, the stronger the snapback. After the harsh recession of 1981-82, for example, the US economy erupted at a more than 7% pace in the first quarter of 1984.

This past recession has been the very worst of all since the Second World War. So--happy days should be returning by 2011, right? The administration is projecting 4% growth in 2012: not a 1984-style boom by any means, but handsome enough.

Think again.

The U. S. private economy continued its horrifying downward trajectory in the second quarter of the year. Private investment in everything except housing dropped 9.6%. Private investment in non-residential real estate slumped 17.3%. Investment in housing -- ground zero of the U. S. economic disaster -- collapsed by 23.3%.

Personal consumption, which had continued to grow very feebly even in the awful first quarter, contracted in the second.

Altogether, we owe the improved news in the second quarter to two sectors: government spending and cars. And the car number is just government spending by a different name. The federal government gave away $3-billion in subsidies to encourage consumers to trade old fuel-inefficient cars for newer models. The 700,000 new cars sold under the program added 0.19% to second quarter GNP growth. Nice!

But the program ended in August, and so did the sales. New car sales tumbled 22.7% in September.

The American private economy remains deeply distressed. The private economy got worse in the second quarter, not better. If car sales are any indication, this third quarter promises no better.

So what follows?

1) Those in the Obama administration betting on a roaring Reagan-style recovery seem to be heading for a nasty surprise, economically and politically.

2) The horrifying unemployment numbers will not improve soon. Unemployment hit 9.8% in figures released Friday. Job-seekers are finding it takes more than 26 weeks to gain a new job, the worst number since record-keeping began in 1948. Unemployment among those 16-24 now exceeds 50%. And the number of those who have lacked work for more than six months has also hit a post-Second World War high.

3) With the private economy remaining so weak so long, U. S. tax collections will not improve any time soon -- meaning more terrible budget deficit numbers and more accumulated government debt.

4) The next U. S. "up" cycle will look very different from the growth cycles of the 1980s, 1990s, and 2000s. Taxes will be higher, to repay the big accumulated debts from this crisis. Young workers will begin their careers with a nasty scare -- and therefore probably much less optimistic expectations than previous generations. Look for more saving and less consumption.

5) Slow recovery for the economy means slow recovery for America's troubled financial institutions. Government support for --and control over --banking will not end soon.

6) Those of us who criticized the Obama stimulus plan for stretching into 2010 may have to eat our words. Government looks likely to be the only source of increased economic demand for at least the next half year.

Politically, the months ahead will be unhappy times for incumbents. Look for Democrats to lose seats in Congress in 2010 and for President Obama's poll numbers to decline further.

Economically, however, the impact will be even greater. The great era of private sector achievement and confidence that opened in 1983 abruptly ended in 2008. America has entered a very different era, in which government predominates -- and will continue to predominate for months and maybe years to come.


Originally published October 3, 2009 in the National Post.