I think that we can all agree that the 1.8% growth in real GDP that was announced at the FOMC meeting the other day is too low to bring the unemployed back to work in numbers, under the circumstances unacceptably low. Let’s take a look at a couple of graphs on GDP.
The first is from a post of James Hamilton’s.
I’ve taken the liberty of drawing a horizontal line at 4%. I think this graph makes it rather clear that anybody who claims that we can grow persistently at a rate of 4% or above is a charlatan. We didn’t grow that fast during the “Reagan boom” (which was itself fueled by Keynesian stimulus—that’s what a deficit is) and over the last ten years real GDP growth has averaged below 3%. I’ve made my opinion on this pretty clear: in order to achieve anything other than a phlegmatic level of growth we’re going to need to start investing rather than consuming. That’s going to be difficult if not impossible unless we control and even reduce how much we’re spending on healthcare.
The second is a breakdown of where the growth that we are experiencing is coming from by sector from Donald Marron:
What leapt out at me from this graph was that even if declining government spending (presumably by state and local governments) weren’t dragging GDP down we still wouldn’t be seeing the level of growth we should be at this stage of a recovery. Something is seriously wrong and I find it hard to believe that we can correct it by borrowing at an accelerating rate.