There are a few things missing from the editors of the Wall Street Journal’s most recent offering, on “Making America Grow Again”:
Republicans in Cleveland were accused of being overly “dark,†and Democrats in Philadelphia (or at least some of them) tried to convince voters that the economy is better than they think it is. But the diminished opportunities that most Americans experience in their own lives is also reflected in the official statistics, which on Friday showed that the economy grew in the second quarter at an annual rate of only 1.2%.
The meager growth took most economists and Wall Street analysts by surprise, coming in at less than half the consensus forecast of 2.6%. The Commerce Department also revised growth down for the first quarter to 0.8% from the prior 1.1% estimate and the fourth quarter of 2015 to 0.9% from 1.4%.
This means that since last September the economy has pumped the brakes from the 2.2% average from 2012-2015 into a near-stall speed of about 1%. Seven years after the recession ended, President Obama on Wednesday took credit for an economy that he called “stronger and more prosperous than it was when we started.â€
Talk about a low bar. When he started, the economy was in recession. The President didn’t mention that the current recovery, the one on his watch that began in June 2009, is easily the weakest since World War II.
The second quarter suffered in particular from the same malaise that has marked nearly the entire Obama era—poor business investment. Consumer spending rose smartly at 4.2% in the second quarter, but business investment fell at a 2.2% pace, and companies ran down inventories for the fifth consecutive quarter.
so I decided to supply them. The first is business investment as a percentage of GDP, “real GDP”, as reflected in the graph at the top of the page. The WSJ editors concentrated too strongly on the recent past but, as you can see, the shortfall in domestic BI has been going on for some time. Some observations:
- It’s pretty obvious that the recession of the early Aughts was caused by the decline in BI. Remedies were targeted at increasing personal consumption—the wrong objectives. That accelerated the pre-existing trend of increasing imports.
- Decreasing BI is signalling recession again (see the WSJ’s charts).
- The phlegmatic increases of the last couple of years don’t nearly fill the hole from the late recession.
Note, too, the power of compounding. When business investment is too low over a long period of time, as has been the case, there’s an aggregate effect. Goosing investment for a year or two won’t produce sustained economic growth.
I can think of two strategies that might increase business investment: reducing the corporate tax rate and stabilizing the regulatory environment. Based on what Hillary Clinton has been saying, do you think that she is likely to do either of those? More the reverse.
The other missing element is that as long as the distribution of income that results from GDP growth is so heavily skewed towards the very wealthy, growth alone is not enough.
The “Gini index” is a measure of income equality/inequality. Note that the huge jump in the early 1990s was not a consequence either of the Reagan tax cuts or the growth in importance of the Internet which took place before and after the jump respectively. What then caused the change?
I can think of two factors. First, China pegged the yuan to the dollar in 1993. As a result of that in effect we began importing inexpensive goods and exporting employment. Second, changes to the tax code made during the Clinton Administration resulted in top management income ballooning. Then there’s also the offshoring of white collar jobs to India that began in earnest in the later 1990s. If you have any other thoughts on the factors that led to sharply increased income inequality in the United States beginning in the 1990s, I would be interested as long as you don’t claim it can be remediated by increasing the personal income tax rates. That’s an irrelevancy.
My prescription for improving the distribution of income is that we’ve got to make more of what we consume and reverse the growth of sectors where income is highly concentrated which includes healthcare and banking. That will require an effort so gargantuan and so contrary to the views of the Power-That-Be that I can’t imagine it happening but that’s what’s needed for growth that feels like growth.
You don’t mention that we had record profits for business during most of that period when investment was low in the current recovery. The stock market has generally been strong, and the economy OK during the era of the Great Moderation. You had a spike of BI in the early 80s, but then down to no growth, while the economy performed well. Since then you don’t have the big spikes, but I wouldn’t be surprised if we looked at the area under the curves and found it was better in the 90s than the 80s before it turned awful in the aughts, with a slight improvement in the teens.
We had a capital gains cut in 2003. Why didn’t that increase BI? Looks like it fell off the table right after the cut. We had a big cut in 1981. BI then had a good two year run from 1983-1985, then fell off the table again, well before it was increased. It was decreased in 1997, and BI immediately starting sliding down. Anyway, if anyone is going to suggest a tax cut to spur BI, the actual data suggest it is just likely to lead to decreased BI, or if it has an effect, it is very temporary.
From where i ma sitting, it looks as though businesses just pass through profits to management and shareholders. They are not re-investing (or paying labor). Since they have been making record profits, from their POV, that is probably just fine.
Steve
Obama’s assertion is just sophistry. But to the thrust.
Very difficult to assess the graphic because of scale etc. but numbers indicate GPDI has fallen about 10%. Key is your point about cumulative effects. It is also important to note that a more service weighted economy and the rise of just in time inventory will bring the number down. I suspect it is nearly impossible to estimate the offsetting investment in automation.
As for solutions, trade restriction gets the knee jerk xenophobia label, regulatory relief is obvious, and I’m tired of hearing how taxation doesn’t matter. You can lead a horse to water….. These politically driven arguments cannot be afforded when you have a sluggish economy. The trade issue is the most vexing.
WRT income inequality, I’m rather unimpressed that compensation schemes are at fault. The dominating effects seem to be the return to capital related to trade, a subject worthy of a thousand words, and more recently (meaning the last 30 years) Fed policy, acutely coming to a head with QE. Another subject worthy of a thousand words is the perceived need to employ easy credit. It probably surprises no one that my view is that it’s the bandaid to attempt to overcome decades of growth retarding intrusion of government, especially regulatory, misallocation of resources and income support schemes. Throw in some demographic trends and you have a mess.
I think Hillary Clinton is neither predisposed nor capable of addressing these issues in any, way, shape or form. In fact, based upon her public statements, she sounds ready to increase the problem. Trump has only modest prospects, but crude as the tool may be, breaking some shit may be the better alternative. They are both miserable people, but Clinton is clearly a crook and can be bought; and she will staff accordingly. Trump may be a goon, but I don’t see him being for sale; how he will staff is an unknown.
We take our victories where we can.
“It probably surprises no one that my view is that it’s the bandaid to attempt to overcome decades of growth retarding intrusion of government, especially regulatory, misallocation of resources and income support schemes. Throw in some demographic trends and you have a mess.”
I’d invite people to really look at Japan and Europe if they want to see where we are going headlong. Europe has only gotten away with its policies this long because we financed their defense.
steve:
That’s why I suggested a more stable regulatory environment which in turn goes to Ben’s remarks about expectations. It’s not just if businesses are experiencing profits but whether they expect them to continue.
Dave-They have continued since the recovery started. That suggests business is not very good at predicting stability. Or, it means they see no need to invest if they can keep making money doing wha they have been doing. I also suspect that a more granular look at investment would tell us a lot. For example, businesses have really cut back on training. They are not putting money into the labor force in terms of wages or training, yet management and ownership keeps making more money. Is this really all just matter of incentives? If the very wealthy keep having massive growth in their estates, why should they risk much in investments?
Steve
Businesses invest more in response to competition and growth opportunities than just to increasing profitability. The latter many times is in response to cost increases in other inputs; simply an offset.
There are too many variables in play and in flux to reduce the issue to measuring output and ascribing it to single factors. That brings the (egad!!) notion of anecdotes and experience into play, which is why I will take a practicing businessman over an academic any day.
“But to the thrust.”
That’s what she said.