I think you can probably guess my answer already, but, let me back up a bit.
New GDP growth data were released yesterday. Though they are preliminary, they indicate a slowdown in the fourth quarter of 2018 to 2.6% (compared to 3.4% in the third quarter). This was not unexpected and was, in fact, more positive than some had hoped. But that’s not what jumped out at me when reading the New York Times’ coverage. Rather, it was the treatment of 3% growth as a significant accomplishment.
This is not unique to them. It has become the standard view and this is disturbing. Low growth has become the new normal.
Consider this: from 1950 through 2000 (that endpoint being the conclusion of the long 1990s expansion), US inflation-adjusted GDP grew at an average rate of 3.77%. Since then, it has been 1.91%. This is a remarkable slowdown.
“But,” the economics-savvy reader might interject here, “this is probably because the second period includes the worst downturn since the Great Depression. Removing that might make a huge difference!”
Nope, not at all. To make it a fair comparison, I divided each period into recession and expansion years and then took those averages by themselves:
avg recessionary GDP growth rate: -1.24%
avg expansionary GDP growth rate: 4.84%
avg recessionary GDP growth rate: -1.32%
avg expansionary GDP growth rate: 2.49%
As you can see, recessions in the second period were more severe, but barely so. Expansions, however, have been almost exactly half the strength since the end of the dot.com expansion. Not only is that a remarkable difference by itself, but don’t forget that these are averages per year and they compound over time. That’s really bad news.
Why has this been the case? There are myriad reasons, but I want to pick out just one because it’s the easiest to fix: the lackluster contributions by government spending to GDP. It is both unfair and unrealistic to expect the private sector to hire all those who are willing to work. For the private sector, labor is a cost. And, as labor-saving technologies advance, so this becomes an even greater challenge. We therefore need the government to play an increasingly active role in contributing to employment and spending.
And we are doing just the opposite.
The three charts below show the contributions of the various components of GDP to overall GDP growth. If that component helped, it’s above the line; if it hurt, it’s below the line. The relative impact is represented by the size of the bar for that particular quarter.
Look at the pictures below (you may need to right click and open them in a separate window where they will be larger) and examine the purple bars, or the contributions of government spending to GDP growth (because 1950 to 2000 is a much longer period, I broke it into two pieces). Of the 168 quarters of expansion from 1950 through 2000, 41 bars show government spending as a net drag. This is 24%. Meanwhile, from 2001 through 2018 (a total of 61 quarters of expansion), government spending (or, rather, lack thereof) is a drag 23 times, or 38%.
To make matters worse, all but three of the latter have come since the Financial Crisis and particularly under the Obama administration. That means that in the extremely sluggish expansion since June 2009 (38 quarters), weak government spending has served as a net drag 53% of the time.
Deficit hysteria and fiscal “responsibility” are weighing us down like an anchor. The US government can’t possibly default on debt denominated in dollars and government spending means money in the pocket of the private sector. The Republicans have done a much better job of not worrying about the debt than the Democrats (at least in practice, if not in rhetoric); hence President Obama’s dismal record of 19 quarters of fiscal drag over 31 quarters of expansion. For President Trump, it’s only been two of eight quarters, and to be fair one of those should really be under Obama since it was first quarter 2017. Of course, we have yet to see the impact of the government shutdown.
If President Trump’s rocky presidency leaves us with a Democrat in the White House in 2021, we’d better hope it’s one of Green New Deal variety. They understand not only how government budgeting actually works (unlike the rest of the Democratic Party), but that we can’t expect the private sector to do all the heavy lifting (unlike the Republican Party).
If not, we might want to start to adjust to being excited about 2% growth.