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The 1.5% Presidency
Growth stumbles for the third time in this Less Than Great Recovery.
Wall Street Journal, Review and Outlook, July 27, 2012
President Obama didn't comment on Friday's report of declining growth in the second quarter, and that's no surprise. The economic story of his Presidency is by now familiar: a plodding recovery that has taken its third dip in three years and is barely raising incomes for most Americans.
"We're still in a position where we are pulling ourselves out of the very deep hole caused by the Great Recession, and there is still—of course—a great deal of anxiety in the country about the economy,'' said White House press secretary Jay Carney. He's right about the anxiety, but if only we were "pulling ourselves out."
The reality is that the Great Recession ended three long years ago. In this Less Than Great Recovery, the economy shows promise for one good quarter then slows back down. As the nearby chart shows, this is the third straight year of sputtering recovery. Growth of 4.1% in the fourth quarter declined to 2% in the first and now 1.5% in the second. The stock market rose as investors bet that the lousy growth will inspire more Federal Reserve easing.
The sliver of good news is that private growth, which is what really matters, was up a slightly less anemic 1.8%, and government spending fell by a minus-1.4% from the first quarter. Housing is also now less of a drag on GDP. But this makes the paltry 1.5% growth more disconcerting, because it means that other parts of the economy are growing less rapidly than they ought to be.
Consumption ticked up only 1.5%, for example, down from 2.4% in the first quarter. This may reflect that wages and salaries are barely keeping pace with inflation. Another negative is that business inventories climbed unexpectedly in the second quarter, which often presages a decline in business spending in the next quarter to clear the shelves.It's important to understand how unusual this kind of weak recovery is. Deep recessions like the one from December 2007 to June 2009 are typically followed by stronger recoveries, as there is more lost ground to make up.
The most recent comparable recession occurred in 1981-1982. Yet as the nearby chart shows, the Reagan expansion exploded with a 9.3% quarter and kept up a robust pace for years. By the 12th quarter of expansion, growth popped up to 6.4.%. At this stage of the Reagan expansion, overall GDP was 18.5% higher versus 6.7% for the Obama recovery, according to Congress's Joint Economic Committee.
Even comparing this recovery with the average since the end of World War II, the Obama growth rate is well below the norm of 15.2%
. The U.S. is running about $1.5 trillion of economic output behind where it should be.
This may sound like an abstraction, but it is the difference between a robust job market and lost opportunity for millions of Americans. It is the difference between a small federal budget deficit and more than $1 trillion for four straight years. It is the difference between a rising or falling poverty rate. Mr. Obama is running for re-election as a tribune of the middle-class against "millionaires and billionaires," but his Presidency has been the worst for the middle class and the poor in decades.
By the way, the federal Bureau of Economic Analysis chose this quarter to revise the post-2008 GDP numbers based on more detailed data, and it shows that the recovery was even weaker in 2010 than previously estimated
. The growth rate for the first two quarters of 2010 were revised sharply downward, and for the year to 2.4% from 3%. The revisions also show the trough in 2009 was not as deep as originally thought.This further discredits the value of the government's 2009-2010 stimulus spending bonanza. Business investment and inventory buildup were both revised downward for 2010, which suggests that the stimulus did very little to boost business confidence.
The Keynesian theory is that government spending will boost consumer demand in a way that spurs more business spending to meet it. But instead the $830 billion stimulus seems to have created a short-term GDP blip based on government expenditures, but no growth takeoff. In return for blowing out the federal balance sheet, Americans got more debt but not more growth. And Mr. Obama says he wants $100 billion in more stimulus now?The tragedy of the Obama Presidency is that it ignored the supply side
: the producers, the risk-takers, the salary earners who put in 50 and 60 hours a week to get ahead. They have been battered by Washington, and no matter how much government tries to conjure growth with more spending and easier monetary policy, businesses won't produce and workers won't work if government threatens to confiscate returns
Banks aren't lending as much as they might in no small part because of Dodd-Frank's penalties and regulations. Investors aren't investing or are sending their money abroad because the President is promising to wallop them with huge tax increases on January 1. Businesses aren't purchasing as much new equipment, or hiring as many workers, because they don't know what the real costs will be from new regulation and ObamaCare.A new report by the Progressive Policy Institute—run by Democrats—finds that if business investment had tracked the normal trend rate during this recovery, investment would be $1.4 trillion higher. The report fingers regulation on business and American investors finding better returns abroad. Yet Mr. Obama's solution is to raise the capital gains and dividend tax rates.
In this policy environment, the miracle is that the U.S. economy is still growing as much as it is. That is a tribute to the natural desire of Americans to better themselves, to create the next Apple, or to discover the next technique for pulling natural gas out of shale rock.Added to the record of the last four years, the 1.5% second quarter should solidify in the public mind that President Obama has failed on the economy
. The challenge for Mitt Romney and the Republicans is to explain how we got to this pass—going back to the mistakes of the Bush years—why Mr. Obama's policies failed, and why their ideas can restore a prosperity that we once took for granted.A version of this article appeared July 28, 2012, on page A16 in the U.S. edition of The Wall Street Journal, with the headline: The 1.5% Presidency.