Popular Economics Weekly
Why has economic growth been so slow since the Great Recession? This is the question haunting many economists these days. Second quarter 2015 real GDP growth (after inflation) was just 2.3 percent six years after its end. This is better growth than any other developed economy, but still much too low for a sustainable recovery.
New York Times columnist and White House advisor Steven Rattner blames in part his own generation of baby boomers for their spendthrift ways that have run up so much debt, and made it harder for their millennial children to earn and save as much as their parents.
“Just to complete a dismal picture, millennials will also be the victims of the irresponsible fiscal policies pursued in large part by members of my generation. The massive budget deficits of recent years and projected needs to meet future obligations to retirees will result in a steady increase in federal debt, from less than 80 percent of gross domestic product today to an estimated 181 percent of G.D.P. by 2090.”
We know that members of the millennial generation are earning less than their parents—even those college-educated, per this graph of the decline in millennial median incomes 2007-13. And real personal incomes aren’t increasing more than 2 percent, which is also the inflation rate, these days. That has to be the major reason so-called aggregate demand—the overall growth in demand for domestic goods and services—is now less than 3 percent annually, mirroring current GDP growth rates.
And it is changes in the amount of aggregate demand (the sum of consumer spending + government spending + investment + net exports) that determines the rate of overall economic growth.
So another element in weaker aggregate demand is the massive cuts in government spending on such items as education, infrastructure and Research & Development by the conservative House majorities. Less spending on public improvements means less investments in future productivity. Delayed investments in decaying bridges, highways, energy and electrical grid networks; even the environment, means lost time and wages for the employed.
Can we blame the baby boomers for electing GW Bush, (or maybe it was the Supreme Court decision nullifying a Florida recount)? We’re talking here about the huge budget deficits generated since 2000, roots of the Great Recession, which has driven federal debt to the highest level since WWII, resulting in the loss of more than 8 million jobs and countless wealth.
But really, Bush’s first Treasury Secretary Paul O’Neill revealed in "The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill," a book written with former Wall Street Journal reporter Ron Suskind, in great detail the reason for the huge budget deficits. The Bush administration chose to cut taxes for investors and corporations, rather than use the 4 years of Clinton budget surpluses to strengthen social security and Medicare.
Further damage was done with the invasion of Afghanistan and Iraq, which has added another $1 trillion to the deficit, after the Bush administration ignored warnings from the intelligence community that Al Qaeda was planning terrorist attacks on American soil, and that resulted in 9/11.
And then we have the consequence of VP Cheney’s policy statement that “deficits don’t matter”, echoing Ronald Reagan’s excuse for his record deficits to outspend the Soviet Union’s military machine. Government spending wasn’t cut, although the tax revenues to pay for that spending were cut during the Bush-Cheney era, which continues to add to the deficit to this day.
This massive deficit spending ultimately resulted in the Great Recession. How? Then Fed Chairman Greenspan’s policies of ultra-low interest rates and failure to regulate Wall Street excesses were designed to help pay for the Wars on Terror, while inflation rates were soaring close to 4 percent.
The result was basically free money, as inflation was increasing faster than interest rates, therefore making it more profitable to borrow than save. Hence the housing bubble, as interest rates below inflation poured gasoline on housing prices. Economists have estimated that those early years of double-digit housing price growth (as much as 20 percent) was fueled in large part by that ‘free’ money.
In the end Main Street and our middle class in particular didn’t benefit from the Bush tax cuts and reduced government revenues. We know where the money went—to the top 1 percent on Wall Street—so much so that the highest earning 25 hedge fund managers reported some $23.4 billion in annual income in 2013, for the privilege of pushing money around, instead of investing it productively.
So there is plenty of blame to go around for so much lost wealth, but the result has been that Wall Street and major corporations were the beneficiaries of the Great Recession, not Main Street.
Harlan Green © 2015
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