Tuesday, November 10, 2015

The Common Cold or Economic Anemia?

Peter has had a cold for nine consecutive weeks. He is running out of Kleenex and good cheer. That’s a long time to have a cold. Peter looked back at his precise records. In the last 67 years he has had 10 colds. The longest one lasted three weeks. Most of them lasted only one week. Nine weeks? Maybe it isn’t a cold! Maybe Peter should be worried.

In similar fashion, Real GDP in the USA has grown by less than 2.5% for nine years running (if we count 2015 which is not over yet). This “economic cold” has lasted since 2007 just before the recession turned real GDP change negative. We have been blowing our collective economic nose every year since. Below are the annual real GDP growth figures (percentage change from the year before):

            2007  1.8%
            2008 -0.3%
            2009 -2.8%
            2010  2.5%
            2011  1.6%
            2012  2.2%
            2013  1.5%
            2014  2.4%
            2015  2.0% (based on 3 quarters)

If this was your kid’s GPAs for each term at Harvard, you might call the Dean and ask what is going on when your brilliant kid has such a mediocre record. The US economy is capable and expected to do much better. For example, the average annual growth rate of real GDP since the end of WWII is about 3.2%. Before the recession started between 1990 and 2006 – the average was 3% per year.  3% is an average of many years  -- during the past we have had recessions followed by strong growth periods many times. The average is not the best we can do. It is what one might call normal.

So I chose 2.5% for my analysis this week because it is clearly below normal. It might be a good rate for Germany or France of Japan – but it is not good for the USA. Nine consecutive quarters below 2.5% growth probably indicates that something is wrong – and that something is not the common cold or an allergy attack.

When you look at my table above – forget the two recession years when real GDP fell. Look instead at the years when we might have had a rapid recovery (with rates well above 3%) and then a sustainable growth phase. We had neither. In those 6 years the best we could do was 2.5% (in 2010). Look at the pattern – a little above 2% one year followed by a little below 2% the next. Those 6 post-recession years average to about 2% per year.

Our politicians seem to agree that this is not acceptable economic performance. But what galls me is that they are not really very serious about doing anything. When is the last time you saw Hillary or Bernie or any of the 92 Republicans shouting about the need to increase economic growth. While they will each say that growth is important, the energy behind a growth remedy is surely lacking compared to the many hot button issues that generate a lot of heat and light (abortion, gays, healthcare, income distribution, immigration, and so on).

This is crazy stuff because if you get higher growth – we take care of some of these problems anyway. Consider if we had grown in the last six years by 3% per year instead of 2% per year. That means real GDP would have grown to $17.3 trillion in 2015 instead of to $16.3 trillion (it was $14.4 trillion in 2009). Just having average growth in the US economy after the recession would have netted us an extra $1 trillion in income. That equates to about $3000 per person. I won't calculate the number of extra jobs but that number would be considerable too. 

Or put another way, this means that whatever is wrong with the US economy since 2009 is robbing the average family of four of about $12,000 each year. Is that not enough to get someone’s attention? 

Government dis-function is the culprit here. The pundits tell us each night that voters are mad as hell at failure in Washington. This trillion dollars of wasted energy explains why they ought to be angry. If candidate X really wants to stand out from the crowd -- he or she might run on a platform of giving them their jobs and a trillion dollars back. Democrats and Republicans approach growth from very different platforms and ideologies. That's okay with me. But let's at least make growth the heart of the debate. Let's at least have a debate. What is causing less-than average growth? How can we address those causes? This is not quantum physics folks. 


  1. They ( Economist) thought that the recovery would resemble a U not a straight line. When one retires from being an economist do they become Weathermen?

    Seriously, what is making this happening? Prior to the 2000 recession the economy was already leveling out for reasons we have discussed previously: exported labor, manufacturing and replacement of labor by digital technology. 1946 to 1964 the US was rebuilding Japan and Europe. Lots of labor there. Then came the credit card buying binge which enabled people to live way beyond there means. Then came global service and manufacturing. Good for Brazil, India and China but not so much for the US. Then came 11M+ workers to replace others in jobs others would not do and would rather collect Federal benefits instead. I think I am starting to get a definition about why to Dr. D's problem about growth.

    1. Lots of good stuff there Hoot but for this last nine years I'd stick with something simpler. We had a major financial crisis followed by misguided over-reacting financial regulation accompanied by an expressed broader set of regulatory policies (energy, environment, etc) that have slowed the economy. We are in European purgatory.

    2. Of course regulations are at an all time high and have created 1,000s of government jobs that do not make anything for the economy except barriers to growth. Regulation was supposed to prevent people from harming one another or being harmed by over zealous governments. But the other things are also in play with capital formation for business growth being one and the off shore taxing at on shore rates for imports into the US by US based ( owned ) companies abroad.