Tuesday, June 21, 2011

Diminished Expectations

Many political analysts are focusing on the consequences of the poor economy for Barack Obama's re-election chances. High unemployment rates and an economy limping along (with a few spurts from massive deficit spending) are hardly propitious circumstances.

Yet these troubles have much deeper roots. According to government calculations, we have been mired in an anomalously extended period of poor economic growth since 2001. Many writers have focused on stagnating middle-class incomes, but looking at GDP numbers tells a similarly disappointing story. Since 2000, GDP growth has lagged well below historical averages. Based on Bret Swanson's calculations, GDP growth from 2001 to 2010 averaged only 1.6%; GDP growth averaged 3.5% from 1947 to 2000. No decade since the 1930s has shown worse average economic growth.

The fact that the economy suffered a huge setback in 2008 and 2009 might skew the averages for the 2000s down, but not by that much. Even before the most recent recession, economic growth still lagged far behind historical precedent. The boom times of the 2000s would be seen as hum-drum in earlier decades.

Here's an overall view of the growth of the American economy since 1930, with numbers drawn from the federal Bureau of Economic Analysis:

Now, to close up on the past three decades:

During the Bush years, 2004 was the only year when GDP growth exceeded the average growth rate of 1947 to 2000, and that was only by a fraction of a percent (3.6% vs. the average 3.5%). With 3.1% growth, 2005 was the only other year where economic growth exceeded 3%.

By way of contrast, there were only 2 years during the Clinton presidency when growth was less than 3% (2.9% in 1993 and 2.5% in 1995). After 1982, Reagan's presidency never witnessed any economic growth rate less than 3%. One-termer George HW Bush had as many years when the economy grew over 3% as his two-term son.

Perhaps an even starker piece of economic spin: until 2000, almost every president since Franklin D. Roosevelt saw multiple years when the economy grew faster than 4% (Bush 41 being the only exception). We have not witnessed that kind of growth in almost twelve years.

Under an extended era of the lowest top marginal tax rates since 1932 (with the exception of the brief period between 1988 and 1992),* we have also seen the most protracted period of economic stagnation since the Great Depression. Whatever the other implications of this fact, it does suggest that tax cuts alone will not be enough to restore the health of the American economy. Tax cuts could be part of a plan for economic renewal, but not the plan itself.

Nor is cutting spending an easy panacea. Federal spending as a percentage of GDP was higher during the Reagan administration than it was during the quiet stagnation of 2001-2007. Again, spending cuts may be part of the solution for our economic travails (government spending as a percentage of GDP was lower in the 1950s and 1960s), but they are not the solution itself.

The implications of this diminished growth are significant for the national body politic. The modern American state, as understood by presidents from Roosevelt to Reagan, is based on the marriage of strong economic growth and generous social insurance. Social Security, Medicare, unemployment insurance, and so forth are the privileges of a wealthy society, and, properly calibrated, they can contribute to this wealth. The ability of the United States to project martial force across the globe and to take a prominent role in the community of nations is also predicated upon national wealth.

Our national finances especially show the strain of this slow growth. At least half of our current deficit is due in some way to the poor economy, and economic stagnation imperils many of our leading social insurance programs. Moreover, many deficit reduction plans on both the left and the right assume economic growth that well outpaces that of the past decade: if growth doesn't improve, we'll need an army of chainsaws to begin to approach fiscal sustainability.

If the next twenty years see the same kind of anemic economic growth as the past ten, any reforms to "save" Social Security and Medicare will have a huge portion of pain. Those programs will become shadows of themselves, as the American economy is crippled with stagnation. A strengthened economy, on the other hand, would likely make the reforms of these programs much less painful. For example, while the trustees of Social Security estimate that the retirement program will exhaust its trust fund some time around 2030 under (comparatively) slow growth expectations; if average GDP growth reaches close to 2.9% per year, Social Security trustees estimate that the program's trust fund will be in the black for the foreseeable future. Reforms might need to be made eventually (especially for Medicare), but increased growth would provide a cushion for them.

This current turmoil provides an opportunity. Societies can gain new vitality by recognizing the limitations of the current status quo and by adapting to changes in the broader political-economic environment. Some might suggest that the United States must or should accept diminished growth. But it seems to me that, after all the storms this nation has weathered, there is no reason to give up on the American project's hope for popular enrichment. After all, Americans in the late 1970s faced an economic paradigm that had outlived its usefulness and an increasingly fractured geopolitical order. But, as Jim Manzi has explored, Ronald Reagan, working with Democrats and fellow Republicans, was able to forge a new consensus that helped lead to a renewed nation. We can cope with our troubles, if we have the imagination to challenge old assumptions and the daring to take new paths.

The Democratic stimulus has failed to meet expectations, and even a return to the conditions and policies of 2001-2007 would be a surrendering of the tradition of American economic growth. There is both an opportunity and need for Republican and conservative leaders to rethink contemporary orthodoxies. Reaganomics, extended past its time, becomes a zombie: rather being a set of policies of vital engagement, it degenerates into dogma and rigid ideology. The world and nation are not the same as they were in 1981. Conservative economic policy needs to recognize that fact.

*Moreover, federal revenue as a percentage of GDP was higher during much of the Reagan, Bush I, and Clinton administrations than during the period since 2000. This lowered revenue may be partly correlated with post-2000 economic stagnation.

No comments:

Post a Comment