Ending Economic and Income Stagnation
By Mark Uncapher
Among her points made at first presidential debate, Hillary Clinton made one crystal clear: she wants to double down on the Obama Administration’s economic policies of higher taxes, more government spending and additional regulation.
With apologizes to Dr. Phil, “How’s that working out for you?”
Americans have experienced the weakest economic recovery since World War II in the seven years since the end of the “Great Recession.” It averaged only 2.1% annual real GDP growth and has never exceeded 3% growth in any twelve month period.
Although the 2007-2009 recession unemployment was very similar to the 1982 recession, the Obama recovery has been much weaker. The Reagan-era recovery featured GDP growth that averaged 4.8% per year, reached as high as 7.8% for a calendar year (1983), and never had a year of economic growth slower than 3%.
The 2015 U.S. real GDP growth was 2.38%, marking the tenth year in a row that real GDP growth came in at under 3.0%, according to the Bureau of Economic Analysis. The longest previous slow growth period was only four years, and the last time that this happened was during the Great Depression (1930-1933).
This year is proving to be no exception. The Federal Reserve, among others, has had to consistently lower its projections for 2016 US GDP growth in the face of disappointing statistics.
As unpleasant as these GDP numbers are, even more ominous for long-term in the US standard of living improvements are the gloomy productivity numbers. For sixty years, U.S. productivity has risen about 2.4% annually. Productivity has stalled during the last decade, averaging only about 1.4% annualized growth since 2004 and just 0.8% annually in the last five years.
Near-universal agreement among economists exists that worker productivity largely determines if our incomes and living standards rise. As long as productivity gains continue to be limited, our incomes and living standard will stagnate.
The key variable to reduced productivity has been a lack of business investment spending.
Both Obama and Clinton proceed from a government-centric, Keynesian theory that an activist government can borrow and spend an economy out of economic downturn. The belief is that spending produces more of a “multiplier” effect than money left in the private sector. Keynes feared private money would be saved or used to reduce debt, rather than to increase demand.
Non-Keynesians economists question the existence of this supposed “multiplier effect.” They observe that markets are less responsive to short-term measures in part because they anticipate the withdrawal of the temporary policies. They also argue that government spending simply displaces resources that would available for other uses. The economy’s underperformance for years after the Obama stimulus program will provide ample data for a generation of PhD. candidates to attack the Keynesian “multiplier effect” theory.
Despite all the evidence to the contrary, Obama and Clinton cling to their Keynesian theory about more government spending, saying that it will “eventually” trickle down from government to the private economy.
They fundamentally misunderstand the investment process at the enterprise level. No business plan or business case can anticipate all the unexpected twists and turns a new business undertaking will encounter. Private risk investment involves uncertainty, balanced with the prospect of enough return to compensate for it. Compare this with public “investing,” the favored term Obama and Clinton use to mask their government spending plans. Invariably their assumption is these public investments must work out because they simply should.
The Federal Reserve Bank’s low interest rate policy compounds private investment reticence. Although borrowing costs are at historically low levels, reduced investment rates of return compress capital investment.
Currently U.S. corporations hold $2.1 trillion in profits offshore, representing money earned outside of the United States. In part the U.S discourages the “return” of this money by having one of the highest corporate tax rates in the world. Yet even more significantly, our U.S. business climate is not attracting enough new investment.
The GOP alternative, offered by Donald Trump and congressional Republicans, contains more incentives for private investment. Encouraging the “repatriation” of offshore profits pays dividends and inspires more economic activity in the US. Regulatory reform needs to include a more thorough evaluation of the economic costs being imposed by proposed rules.
The alternative offered by Hillary Clinton simply continues economic stagnation of the Obama years.