By J.T. Young
It is time America stopped talking about the recovery and started worrying about the economy. As the four-year anniversary since the economy last shrank approaches, we should focus on its subpar growth. It is time to ask what impact government has had on the economy over the short- and long-term.
America’s economy has not shrunk since Q2 of 2009. Yet, if the Congressional Budget Office’s estimates of just 1.4% real GDP growth this year prove true, America will have experienced its worst four consecutive growth years of GDP in the Bureau of Economic Analysis’ data going back to 1930.
Looking at the economy in 10-year increments starting from 1948 (when declines from wartime spending had ended), averaging GDP’s annual growth percentage shows the following:
- 1948-57: 3.80%
- 1958-67: 4.28%
- 1968-77: 3.18%
- 1978-87: 3.15%
- 1988-97: 3.05%
- 1998-2007: 2.99%
- 2008-2013: 0.73%
Even if 2008 (-0.3%) and 2009’s (-3.1%) negative annual GDP percentages are dropped (something undone for the other periods) and only the 2010-13 period is averaged, the result is just 1.95% – still over a full percentage point below the previous decade’s.
That there was heady growth in the two decades following WWII makes sense. The U.S. had emerged as the world’s lone economic Super Power, with the rest of the world’s major economies either shattered by war or shuttered by communism. To understand America’s economic advantage, consider that of the IMF’s top ten 2012 national economies, only Brazil (#7) and India (#10) – accounting for just a combined 6.1% of today’s global GDP – were relatively untouched by WWII.
As shattered economies recovered, and shuttered economies opened, with communism’s fall across much of the world, the global economic gap began to close. America’s economic growth slipped gradually but consistently – from 3.18% to 2.99% – over four decades.
What we have seen over the last four years is unlike anything during the last seven decades. Such a dramatic break with the past, begs the question: Why? Does the financial crisis alone account for what we are seeing? For four years, we have sought to convince ourselves it does. Perhaps it is finally time we looked harder to see if the problem runs deeper.
There has been a concerted government effort to compensate for the recent crisis – through tax cuts, “stimulative” spending and historically low interest rates. It is therefore natural to look at government actions over the last seven decades.
Interestingly, taxes as a percentage of GDP do not show the great discrepancy that might be expected. In 1948, federal revenue equaled 16.2% of GDP. Under CBO’s estimate, taxes will equal 16.9% of GDP this year. Nor have they been high during the post-crisis period: 15.4% in 2011, 15.1% in 2010 and 2009, and 17.6% in 2008. All of these are below CBO’s calculated 40-year average of roughly 17.9%.
However, federal spending has been an entirely different story. In 1948, federal outlays equaled 11.6% of GDP. CBO estimates that they will equal 22.2% in 2013 – almost doubled. And they have been far higher of late: 22.8% in 2012, 24.1% in 2011 and 2010, 25.2% in 2009, and 20.8% in 2008. In 2007, prior to the crisis, they were 19.7% and CBO calculates their 40-year average at 21% – all far higher than their 1948 level.
It is quite clear that America’s economy has not only been “stimulated” by extraordinarily high government spending in the crisis and post-crisis period, but has become increasingly affected by high government spending over the longer-term too.
At the same time government spending has increased as a share of the economy, private sector activity has necessarily declined in proportion. While this has been obviously true during the current post-crisis period, the longer-term effect, while more gradual, is equally clear.
Yet in both cases, the economy has hardly responded in a commensurately positive manner. Despite enormous government intervention in the near-term, we are witnessing dramatically subpar growth. And while not as dramatic over the last four decades, when government spending has been greatly increasing, economic growth has been noticeably declining.
Is it possible that a cause and effect relationship exists? While government can tax, and borrow, and spend, it is simply churning existing wealth without creating new. As George Gilder pointed out: “Wealth consists in assets that promise a future stream of income.” Government does not invest – despite terminology intended to justify government spending. It does not produce future income streams, as does private sector investment. So as private sector input makes up less of overall GDP, GDP growth becomes relatively less productive going forward.
Nor is increased government intervention without its economic drag. If government is to have a greater role, it is going to have a greater say. Increased regulation, higher taxes, higher borrowing – all come along with government economic intervention.
Since 2008, federal debt held by the public has more than doubled – from $5.8 trillion to an estimated $12.2 trillion in 2013. While it’s full negative impact is unfelt, because of historically low interest rates, once interest rates return to normal levels, this doubled debt will have a decidedly negative economic impact, as private sector investment is squeezed.
Government was supposed to play a compensating role to the economic downturn in the post-crisis period. Yet after the worst four years of economic growth in decades, has not the time come when we can at least raise the question whether it has done so? To bolster that line of questioning, we need only look at America’s long-term economic growth to take the question a step further: Has government spending and its crowding out of private sector activity had a contributory effect in slower growth?
Regardless how we are predisposed to answer these questions, there are inescapable facts in both the short- and long-term growth figures. Something is very different, and seemingly very wrong. This is clear in the current post-crisis period, but it really stretches back much further and could be far more serious than just a temporary economic slowdown.
J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.
