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Already Dismal Economic Growth Revised Downward to 1.1 Percent in the Second Quarter

08/29/2016

In the television drama, The West Wing, President Josiah Barlet, played by Martin Sheen, laments to his chief of staff, Leo McGarry, about the challenges of growing the economy. "Historically, 2 to 2.5 percent GDP expansion is classified lackluster even anemic economic growth," Bartlet said. "Four and a half to 5 percent is needed just to be considered robust and not even spectacular."

Of course, The West Wing is a work of fiction. But in the show, Bartlet is a Nobel Prize winning economist, though, as a Democrat, his views are clearly Keynesian in nature on the show. References to the work of Milton Friedman are few, but when he is mentioned, it is usually snide or dismissive. Still, the definition of positive economic growth Barlet shares is accurate.

Another economic marker, though not mentioned in the show, is job creation. An economy that is creating 120,000 to 150,000 jobs each month is effectively not creating jobs because this is the level of monthly creation needed to keep up with population growth. If an economy experiences two consecutive quarters of economic contraction, it is considered to be in a recession.

When it comes to economic growth, though, the United States is barely limping along. If 2 to 2.5 percent growth is "classified lackluster even anemic economic growth," as Bartlet said, recent quarterly estimates from the Bureau of Economic Analysis should be considered dismal or exceedingly poor. In the first quarter of 2016, real GDP grew by only 0.8 percent. The early estimate for the second quarter was 1.2 percent. That estimate, however, was revised down slightly Friday to 1.1 percent.

While such dismal economic growth may not necessarily be the new normal, the United States' economy is in unusual territory. The United States has not experienced annual economic growth above 3 percent since 2005. As has been mentioned before in this space, President Barack Obama is likely to be the first president since Herbert Hoover not to experience economic growth above 3 percent during his presidency.

The annual changes in GDP from 1981 through 2015 is in the chart below.

Annual GDP Growth: 1981-2015

The United States' recovery after the July 1981-November 1982 recession was incredibly robust. The economy grew at by 4.63 percent in 1983 and 7.26 percent in 1984. In fact, GDP growth never fell below 3.46 percent in Ronald Reagan's presidency after the recession in the early 1980s. The Reagan administration focused on income tax cuts to spur economic growth. While he also raised some taxes, Americans saw a net tax cut during his administration. Reagan's record on spending is subject to much criticism, primarily because of increases in defense spending. But, overall, total spending under Reagan grew by 2.5 percent annually, according to the Cato Institute.

The weak recovery that the United States has experienced under Obama is a result of regulations that are strangling the economy, larger tax burdens on Americans, and a growing of budget deficits and debt. The United States has been down this road before. After the Great Depression, President Franklin D. Roosevelt and his administration managed to pass and implement a host of new economic laws and regulations, most of which benefited the politically connected or industries with which the administration hoped to curry favor. Of course, we know today that the New Deal actually prolonged the Great Depression by seven years.

Sadly, too many lawmakers keep doing the same thing over again while expecting a different result. That is the very definition of insanity. If lawmakers were serious about economic growth and giving all Americans a boost, they would go back to what we know works: pro-growth policies that make the tax code fairer and less complicated, reductions in regulations, and spending cuts.

1 comments
fgbouman's picture
fgbouman
09/03/2016

Too much ideology and too little economics in this column. Of course one cannot explain a century of the U.S. economy in one column but three egregiously misleading statements in one column are a bit much.
Herbert Hoover failed to grow the economy because he thought that national budgets needed to function like household budgets. The Great Depression was a balance sheet depression. In such a depression it is essential to get liquidity into the general economy. Many of Hoover's actions were the reverse of that which, if anything, speeded and deepened the depression. Through luck rather than wisdom, Roosevelt injected stimulus into the economy and reversed the course of the Depression. Unfortunately, thinking things were better, he reversed course and sent the economy back down the slope until preparations for WWII turned it around.
Reagan did indeed cut taxes in net but they probably had little to do with the economic growth experienced during his tenure for a variety of reasons, one of which is that such cuts take many years to work through the economy by which time their actual effects are hard to discern. More important, though, was the effect of Paul Volker's tenure as Fed Chairman. Spiking the Fed Fund rate to 20% and quickly killing inflation, setting up the economy for a return to real growth. Reagan was the beneficiary of Jimmy Carter's decision to hire Volker just as Bill Clinton was to benefit from Reagan's tinkering with the tax code.
Our current malaise arises from the fact that we are in a balance sheet recession and Congress has insisted on exactly the wrong cure, exactly as Hoover and later Roosevelt did. A sustained stimulus providing the infrastructural components to put American business in a position to dominate its foreign competition was needed, but instead Congress has chosen to go the opposite direction with productive spending while wasting hundreds of billions on unproductive military expenditures.

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