Where Is the Growth?

As is typical for economists, Glenn Hubbard and Kevin Warsh do a much better job of stating the problem than in proposing solutions in their Wall Street Journal op-ed:

The recession was officially over in mid-2009, and toward the end of that year the economy showed signs of recovery. A massive fiscal spending stimulus had been signed into law. The Federal Reserve was embarking on an unprecedented monetary accommodation. Leading economists and forecasters predicted the economy would respond to this policy elixir with a great surge in performance.

On Dec. 9, 2009, for example, the Federal Reserve staff presented its “Long-Term Outlook” for economic growth to the Federal Open Market Committee. In the so-called Greenbook forecasts, Fed staff projected that real GDP would grow by 3.6% at an annual rate in 2010, increase to 4.5% in 2011, peak at 4.7% in 2012 and 2013, and then grow 3.2% in 2014. These kinds of growth rates were not without precedent, and the Fed’s forecasting record compares favorably with the Blue Chip forecasts of private forecasters.

But growth has been about one-half of the Fed’s projections. The country has experienced the weakest expansion since World War II. Participation in the labor force is near its lowest level since 1978. The country is in the midst of the worst five-year run for productivity ever measured outside of a recession. All the while, households and businesses with big balance sheets have been enriched by the superior performance of the stock market.

While I think the Obama Administration’s and the Democratic Party’s culpability in what we’re seeing is debatable, I think we should agree with Shakespeare that nothing will come of nothing and we need some solutions that target the problems. Here are Mssrs. Hubbard and Warsh’s proposals:

This means policies that bring more people into the workforce. It means encouraging real capital investment to drive higher levels of productivity growth. It means resetting long-run expectations of potential for every individual, household and business. It means making the United States the best place in the world in which to invest and work.

Examples? Fundamental tax reform that is directed at increasing the incentives for work and driving investment in productive assets. Real regulatory reform that firmly and consistently recognizes, measures and balances economic benefits and costs—and no longer protects incumbent firms from disruptive new competitors. Tax and regulatory reform can make the United States the preferred destination for work and investment.

Trade policies must continue to break down non-tariff barriers to open global markets. Education policy must be geared toward empowering schools to put students and the skills they need above entrenched interests. And support for training can foster investment in skills over time.

As the logicians might say, those may be necessary but will they be sufficient? I don’t think so and I’ll try to expand on that in a later post. Suffice it to say that I think that the Obama Administration and Democratic Party’s views are dominated by a zero-sum view of the economy and that they’re much more deeply committed to divvying up the economic pie than they are to increasing its size.

10 comments… add one
  • jan Link

    Rather than growing the economical “pie,” this administration seems determined to instead entice rancor among people, grooming their political favor and cultivating larger agenda-sustaining constituencies, which results in growing their odds of winning future elections. Consequently, divide and conquer would be an apt slogan to attach onto the last seven years of governance. Unfortunately, other goals, related to long term fiscal policies, become merely second tier concerns when pitted against meeting the demands of such inflexible, socially progressive ideology.

  • steve Link

    First, Reinhart and Rogoff showed that, on average, you have 5-8 years of slow growth after an international financial crisis. We are getting exactly what was predicted. Secondly, just looking at jobs, the Bush reverie was actually worse. This recession started out from a deeper trough, but has created way more jobs, especially in the private sector. Third, am I the one to find this funny?…

    “These kinds of growth rates were not without precedent, and the Fed’s forecasting record compares favorably with the Blue Chip forecasts of private forecasters.”

    These are the guys who totally missed the worst recession since the Great Depression. How about “compares favorably to a ouija board”.

    Last, Hubbard’s prescription is basically a call to replicate the policies followed from 2001-2008. Do we really want to do that? What would make it lead to growth this time? I think we should do some of the things he suggests just because they make sense and need done anyway. Real tax reform would be great (although we all know he really means just cut taxes at the top). Lessening the effects of crony capitalism sounds great, but it would need to include the financial sector and I would bet you he would fight that.

    Steve

  • jan Link

    First, the economic predictions cast, once the recovery of 2009 begin, were graduated somewhere in the range of a GDP of between 3 upwards to 4. As reality has demonstrated, they have been nowhere near those early estimations.

    Second, Obama may have come into a deep economic trough, but it was one that already had the fiscal wheels moving towards recovery. It was his predecessor who passed the controversial TARP legislation, in which a large chunk was deliberately left for the new president to apply towards boosting a severely wounded economy. Obama also was given free rein to pass a huge stimulus plan — which in hindsight was poorly distributed. The jobs touted under the current administration have also been mostly part time and low-paying — far less rewarding than the jobs lost. And, the continuing low work participation rate, IMO, overshadows the glow of the (manipulated) UE that is officially posted. Small businesses continue to be stressed by odious government regulations, and big business appear to still lack incentives to bring jobs back to this country. It’s just more difficult to make it in this country than it used to be!

    While Obama came into office after the ’08 crash, with some remedies already in place, Bush’s entrance as POTUS, was exactly the opposite. His first year was marked by a dot com bust resulting in a receding economy, which was then impacted, less than eight months into his presidency, by 911 sending the country reeling into a fiscal and mental kind of shell shock. Consequently, Bush’s watch encompassed the full brunt of economic disruption, from the very beginning to the end, rather than coming in with “fixes” already in place. Because of this, I think Bush faced a complete volume of dire, as well as unexpected, circumstances that had to be fully addressed by him. Furthermore, unlike, Obama, there was far less talk of “inheriting” problems, and more done to diminish them. Whether or not his policies were correct continues to be up for debate. But, at least he shouldered his own presidency and didn’t always throw blame backwards to someone else. Even the housing crisis, front and center to the ’08 fiscal melt down, was a mixture of inept, nearsighted policies created and endorsed under a republican president and a democratic congress. IOW, both parties deserve credit for mishandling the events prior to the crisis.

    Third, tax reform seems to be more on the lips of republicans than democrats, in areas of redesign and simplification of the tax system, rather than merely cutting taxes. For instance, Rand Paul came out a few days ago with a flat tax proposal that is being openly discussed (and criticized). However, lowering taxes is certainly an old mantra used by republicans. But, just as ancient and wore-out is the prescription of raising taxes on the rich, applied by democrats — especially by the social progressive wing of the party. As for crony capitalism, using the wealth of wall street and massive donations by the unions and liberal super PACs, the democratic party far outstrips the republicans in amassing dominating fiscal support during elections, as they continue to deride the Citizen’s United decision . I would also add lobbyists, the lack of transparency, the use of unelected, oftentimes inexperienced czars to create and run policy as glaring cornerstones of the last 7 years of governance, along with increased polarization of Congress and the country.

  • steve Link

    “First, the economic predictions cast, once the recovery of 2009 begin, were graduated somewhere in the range of a GDP of between 3 upwards to 4.”

    A prediction made by the Fed, the same people who missed the Great Recession coming. As I noted, R and R, based upon massive historical data, predicted slow growth for 5-8 years. Right were we are. I will go with the historical perspective. Feel free to cite the folks who missed the huge downturn.

    No, Obama was not given a free hand. He had 60 votes, but a lot of those were from conservative states. They set a goal of keeping it under a trillion since they knew they couldn’t get anything larger past. Poorly distributed? Based upon what? About 1/3 was tax cuts. A lot of the rest went in the form of block grants to the states. I believe standard GOP doctrine is that the states know best how to spend money. Did some states not sue the money wisely? No doubt. Let’s remember that when we discuss black grants and Medicaid.

    The comparison to Bush and Obama and the situations they inherited is just bizarre. Obama inherited an economy with hundreds of banks failing. With the credit markets freezing. Some, but not all of that was over, but we had record levels of private debt, horrible balance sheets for banks and businesses. Bush inherited an economy that was just starting to suffer from a bubble busting, but the banks were intact, private debt was manageable and businesses were intact. The fact that you would even begin to compare these two is just mind boggling. ODS is real.

    Last of all just to take one of the many false claims you make, you do realize that Wall Street preferentially donate to the GOP I hope. Go look at Open Secrets. The GOP, historically collects about the same as the Dems. Unions make up a tiny percentage of those working. (You guys need a new bogeyman. Really.) Polarization was increased? By the party that said its most important job was to get Obama out of office? I’m shocked.

    Steve

  • Last of all just to take one of the many false claims you make, you do realize that Wall Street preferentially donate to the GOP I hope.

    That’s actually a more complicated question. For the 2008 campaign, Wall Street donated more to Democrats. for the 2012 campaign, it was Republicans who benefited more. Over the period of the last 25 years Wall Street donations have favored Democrats by a ratio of about 3:2.

    I think the fairest interpretation is that both of the major political parties are in Wall Street’s pocket.

  • TastyBits Link

    @steve

    The comparison to Bush and Obama and the situations they inherited is just bizarre. Obama inherited an economy with hundreds of banks failing. With the credit markets freezing. …

    Candidate Obama should have done everybody a favor and admitted he was too incompetent to handle the job. I guess he was too incompetent to assess his competence.

  • jan Link

    Last of all just to take one of the many false claims you make, you do realize that Wall Street preferentially donate to the GOP I hope. Go look at Open Secrets.

    Open Secrets lists the top donors. The first six are unions, which contribute anywhere from 97-100% of their money to democrats. The SEIU, who sends it’s volunteers around the country supporting democratic candidates and causes, alone gave $222,434,657, or 99% of their monies, to democrats. That is far from chump change, and considerably higher than the organizations who primarily donate to republicans.

    I think the fairest interpretation is that both of the major political parties are in Wall Street’s pocket.

    Big business tries to stay nice with both political parties. It’s all about profit and self-interest more than anything else. Just look at Trump who admits to greasing both party’s palms because it makes good business sense to do so.

    However, when it comes to political donations I see the dems as being the most prolific fund-raisers, while lamenting the lack of campaign finance reform at the same time. A vivid example of such hypocrisy is Obama’s 2008 run against McCain where Obama backed out of a prearranged agreement with McCain to only take public funding. A flip-flop characteristic that has become a pattern during his entire time in office.

    Obama’s decision to become the first major-party candidate to opt out of public financing for the general election frees him to continue his record-shattering, Internet-driven fund-raising until November – and probably to outspend McCain by a vast amount. But it opens the Democrat to accusations of an about-face on past statements that he would take the public grant and limit spending to that amount if the Republican nominee agreed to do likewise.

    The comparison to Bush and Obama and the situations they inherited is just bizarre.

    No, it’s not. Obama’s inheritance originated from the interaction and directives of two parties — the republicans and democrats. Barney Frank et. al. were heavy contributors to the fiscal fiaso cratering the economy, derived from long-term bad housing and banking practices/legislation. Even the democratically sponsored Dodd-Frank Bill, birthed from the ashes of the ’08 economic crisis, is hardly considered well-thought-out as it is unfairly impacting smaller community banks while giving large banks a break.

    The bottom line is that while Bush and republican policies certainly played a heavy role in the 2008 debacle, democrats were also partners in mishandling the economy — something they don’t like to discuss. The same inept leadership, on both sides of the aisle, is also rampant in the current administration. But, again the dems want to cast the Republican Congress as the main culprit, completely ignoring the lack of legislation debated, let alone brought forward, under Reid’s Senatorial leadership, as well as the documented isolation of the president in working with Congress.

  • Dodd-Frank Bill, birthed from the ashes of the ’08 economic crisis, is hardly considered well-thought-out as it is unfairly impacting smaller community banks while giving large banks a break.

    That’s a pretty fair example of something I’ve referred to from time to time as “having the wrong instincts”. The immediate instinct of many people in Big Government is to want to deal with Big Banking. The country they want is one that Theodore Vail would be proud of.

  • steve Link

    Here is the link. The FIRE sector has donated to the GOP/Dems at a 57% to 42% ratio, favoring the GOP. What i have always said is that they lease the Dems and they own the GOP.

    Barney Frank? You realize he was a minority Congressman. This gets old. If a single Congressman from he minority party can control everything, then why didn’t some GOP Congressman do the same when they were in the minority. Bizarre.

    Here I will make the comparison easy for you. How many banks failed due the recession Bush faced? How many from the recession Obama faced? You should look it up, but I will help you. One of the numbers is zero.

    Steve

  • steve Link

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