Why The Years of Slow Growth?

Popular Economics Weekly

Pundits have decried it. Donald Trump has criticized the ‘lousy’ U.S. economy in many of his Tweets, and economists have lamented the 2.4 percent GDP growth rate since 2000, at the time of the dot-com bubble bust. This is when prior recoveries have averaged 3-4 percent growth—at least in the early years.
The agonizingly slow pace of recovery from the Great Recession is easy to explain, say most economists. The Economic Policy Institute (EPI), a labor think tank, recently said it best. It is the result of austerity policies championed by Republican policymakers at the federal and state levels.

“Like every other postwar recession before it, the Great Recession was caused by a shortfall in aggregate demand, meaning that the spending of households, businesses, and governments was not sufficient to keep the economy’s resources fully employed,” said the EPI.

Graph: EPI

Per capita government spending in the first quarter of 2016—27 quarters into the recovery—was nearly 3.5 percent lower than it was at the trough of the Great Recession. By contrast, 27 quarters into the early 1990s recovery, per capita government spending was 3 percent higher than at the trough; 23 quarters following the early 2000s recession (a shorter recovery), it was 10 percent higher; and 27 quarters into the early 1980s recovery, it was 17 percent higher.

What is aggregate demand, and how is it increased? FDR’s incredibly intelligent Fed Chairman Marriner Eccles explained it in his memoir Beckoning Frontiers (1951):

“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

He understood our U.S. economy was entering the era of mass consumption, and unless consumers plus businesses plus government spent and/or invested enough money in it, there would be little or no growth. If fact, it was the severity of the contraction in spending that caused both the Great Depression and Great Recession.

And because there was record income inequality in 1929—only equaled again in 2007—consumers ran out of money to spend, which meant in turn businesses stopped investing. So it had to be government that injected sufficient demand into the U.S. economy to keep it from collapsing completely. That was the reason for the New Deal that employed millions in government-paid jobs, as well as social security, unemployment insurance and all the social programs that enabled US to win WWII.

The pickup in government spending in the early 2000s recession and 1980s recovery were during Republican administrations (i.e., during GW Bush and Reagan presidencies), which meant they had no problem spending public monies to boost economic growth. But when it came to Obama’s term, every attempt was made by the mostly Republican House in particular to cause him to fail.

It began with the election of some 80 Tea Party members to the House in 2010, then government shutdown in 2011 when they refused to ok a budget, so that the U.S. government almost ran out of operating funds, resulting in the first loss of AAA rating for U.S. debt by a bond rating agency in modern history.

That is why real annual GDP growth during Reagan’s term peaked at 7.3 percent, and GW Bush’s term at 3.8 percent. The highest modern growth rate was achieved during FDR’s New Deal and WWII, which boosted U.S. growth to a peak of 18.9 percent in 1942. Real GDP growth (i.e,, after inflation) has been downhill ever since.

Graph: CBS

As CBS News recently wrote in a report entitled, Obama May Become First President Since Hoover Not to See 3% GDP Growth: “The last year that real GDP grew by 3.0 percent or more, according to BEA, was in 2005, when it grew by 3.3 percent. Since then, the United States has gone a record ten straight years (2006-2015) without a year in which the growth in real GDP was at least 3.0 percent.”

So in fact without government spending to boost demand during slow times our economy has suffered. And now President-elect Trump has proposed a $1 trillion infrastructure spending plan that is sure to boost growth again.

“Despite the Great Recession being the sharpest and longest on record since World War II,” wrote the EPI, “and despite monetary policy reaching its conventional limits to boost spending early in the recession, policymakers made damaging decisions to limit public spending following the recession’s trough in 2009. This growth has been historically slow relative to other business cycles even as the economy needed substantially faster-than-average growth to mount a full and timely recovery.”

So let the record show, government has never been the problem when Republicans needed to boost growth, only when Democrats do. What is wrong with this picture?

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Brexit?

Financial FAQs

Brexit, the British vote to exit the European Union, was precipitated by many factors, including Brit’s fear of loss of sovereignty due to the Schengen requirement that it open its borders to citizens of other EU countries.  And it may lead to a breakup of the Eurozone.

It was a real fear—that eastern Europeans would deprive Britons of jobs by migrating from countries whose wages were lower. Great Britain’s minimum wage is more than double that of countries such as Poland, Czech Republic, and Romania, for instance, which has meant that some 1 million immigrants from other EU countries have migrated to Great Britain seeking better paying jobs, and pushing out many blue collar Brits in the process.

Graph: Trading Economics

So there was good reason for the Brexit vote. Great Britain’s unemployment rate only came down to 5 percent in 2016, after hovering at 8 percent since 2008, the end of the Great Recession, largely due to misguided economic policies.

Britain’s Prime Minister David Cameron was hoisted on his own petard when he called for the referendum that precipitated Brexit, in other words. He was a strong supporter of German austerity policies that led to two recessions in most of the EU, policies that advocated cuts in government programs combined with higher taxes for Eurozone countries.

Poor job prospects in many of those countries hardest hit by the Great Recession prompted the flight to countries least affected, such as Great Britain, even though Great Britain was still suffering from job losses. The Guardian has been trumpeting this truth since Cameron’s austerity policies were instituted in the Conservative Party’s 2010 ascent to power.

“Austerity – which has affected the living standards of many working people – was not imposed by the EU, but was a choice by the current government. When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain’s contribution to the EU – at £8bn, just 1.2 percent of public expenditure and outweighed by our economic gains from membership – to take on disproportionate significance.”

Many major economists have written about the failure of austerity policies since the end of the Great Recession, including Nobelist Paul Krugman.

Graph: Slate.com

“Since the global turn to austerity in 2010, said Krugman in the Guardian, “every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Maybe we should also mention it is the reason why the Eurozone is in danger of breaking up, all because of not knowing how to deal with the huge amount of debt incurred during and by the Great Recession. All countries suffered, as they did after WWII. But the western world had visionary leaders then, willing to rebuild those European countries in particular with something called the Marshall Plan—some $17 billion in loans and grants—one quarter of which went to Great Britain.

It was also a time when 50 percent of German debt was forgiven—that is, cancelled. But are there any such leaders today that might help Greece and Portugal, at the very least? Unfortunately, we are instead harking back to WWI history, and the punitive demands made on Germany for war reparations that precipitated Hitler and WWII.

London School of Economics Professor of Economic History Albrecht Ritschl conducted research into how Germany was able to pay off its debts after the two World Wars. Ritschl looked in detail at the financial assistance that was paid to Germany under the Marshall Plan, in which the US gave that $17 billion – around $160 billion in today’s values – in economic support to help rebuild European economies. He showed that while the transfers were tiny, the cancellation of debts was worth as much as four times the country’s entire economic output in 1950 and laid the foundation for Germany’s fast post-war recovery.

If we had such leaders today, could it have prevented Brexit and the possible breakup of the Eurozone—and maybe the European Union, as well?

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen