The Obama Growth Deficit
A modest first-quarter rebound, but not enough to lift the middle class.
April 26, 2013, 6:42 p.m. ET.
The U.S. economy hit a new milestone in the first quarter of 2013: Annual output of goods and services eclipsed $16 trillion. The 2.5% growth pace in GDP through March seems like a wild night on the town after the 0.4% slog at the end of 2012.
That's the good news. The bad news is that this recovery is still half the pace of the normal expansion. The Joint Economic Committee reports that if the economy had grown at the typical pace coming out of recession, at this stage GDP would be closer to $17.4 trillion. This $1.4 trillion growth deficit is roughly the size of the combined annual production of Michigan, Ohio and Pennsylvania in 2011.
The U.S. economy hit a new milestone in the first quarter of 2013: Annual output of goods and services eclipsed $16 trillion. The 2.5% growth pace in GDP through March seems like a wild night on the town after the 0.4% slog at the end of 2012.
That's the good news. The bad news is that this recovery is still half the pace of the normal expansion. The Joint Economic Committee reports that if the economy had grown at the typical pace coming out of recession, at this stage GDP would be closer to $17.4 trillion. This $1.4 trillion growth deficit is roughly the size of the combined annual production of Michigan, Ohio and Pennsylvania in 2011.
The dividend and personal income windfall from late last year may partly explain the healthy increase in consumer spending in January and February despite the big payroll-tax increase. Consumer spending wasn't as robust in March, and the longer-term worry is that higher tax rates on business and investment income will dampen economic activity and funding for new enterprises.
It's been 15 quarters since the economy hit its recession trough in June 2009. The growth rate (on an annual basis) has since averaged 2.1%, or half the 4.4% average rate of the past nine recoveries. The Reagan expansion averaged 5.3% through the same 15 quarters, according to the Joint Economic Committee. The current expansion's subpar growth performance explains why unemployment remains so stubbornly high and median household incomes after inflation are nearly $3,000 below where they were when the recession ended.
The White House was quick to blame the spending sequester for deterring faster growth. Chief White House economist Alan Krueger warned that the sequester's "arbitrary and unnecessary cuts to government services will be a headwind in the months to come, and will cut key investments in the nation's future competitiveness."
The reality is that government spending did decline by 4.1% in the quarter, and this shaved 0.8% off a GDP calculation that counts government spending as a plus no matter what it is spent on. But 75% of those federal cuts were in defense, which the White House wants to cut. When defense spending fell during the 1990s, GDP still rose at a faster pace because private growth was so much stronger.
What we are experiencing now is not some "austerity" shock but a slow downward adjustment in government spending to a still high 22.7% of GDP from the unprecedented high of Obama's first term average of 24%. Those spending levels weren't sustainable, unless you want to send federal debt as a share of GDP even higher than the 76.6% it is expected to reach this year.
We are now in year five of what has been one of the great experiments in Keynesian economic policy. We were told that if Congress would spend $830 billion more temporarily, and the Federal Reserve would unleash monetary policy, a recovery would begin and rapid growth would resume. Larry Summers, Alan Krueger, Jared Bernstein and their allies on Wall Street got their policy wishes. Their economy has delivered mediocre growth and declining middle-class incomes—though we will concede that the wealthy have done well as the stock market has recovered.
So now the same Keynesians say the spending blowout wasn't large or long enough, taxes still aren't high enough, and monetary policy hasn't been easy enough. What this economy really needs is a statute of limitations on intellectual denial.
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