What Is Wrong With The U.S. Economy?
by Alex Saitta
June 24, 2010
Slow Economic Growth:
Average annual GDP the past decade averaged only 1.9%. That is the lowest rate since the decade of the 1930's. Reflecting the weak growth of the past 10 years, it is is no surprise the value of the 30 Dow Jones Industrials is no higher now than it was in 2000.
The U.S. economy experienced a recession from December 2007 to June 2009. It was quite a long recession and deep recession. Since the 1930's, the two most severe recessions were this one and the one of 1981/82. Most likely the 1981/82 recession was worse because it had both high unemployment, on the heels of very high inflation. This recession just had high unemployment.
Officially, the unemployment rate in late 2009 peaked 10.4% (a bit lower than the 10.8% rate of the 1981/82 recession), but discouraged workers are now more narrowly defined, you can make the case that unemployment today is probably 1% to 2% higher than the recession of 1981/82. Let me explain.
The monthly unemployment survey data of households is how the unemployment rate is determined. The rate equals those employed divided by those employed plus unemployed. All respondents are asked, are you working? If not, are you interested in work? Have you looked for a job in the past 12 months?
If the person answers Yes to the first question, he is considered employed. If he answers No, Yes, Yes, he is considered unemployed. If the person answers No, Yes, No, that person is neither considered employed nor unemployed. Thus, even though that person has lost his job and would like to work, if he has not looked for a job the past 12 months and decided to take care of the kids, go back to school or just watch TV all day, he is no longer considered unemployed. During the 1980's and before, that person was still considered unemployed even if he had not looked for a job in more than 12 months.
The past 20 years the government has made all sorts of changes in how economic stats are calculated to make them look more rosey than they actually are. To read more see www.shadowstats.com.
Not only has growth the past decade been historically weak, and this recession long and deep, the recovery coming out of the recession has been weak. Let's make a comparison to the 1981/82 recession. Quarterly growth rates that followed in 1983 and the start of 1984 were 5.0%, 9.0%, 7.9%, 8.3%, 7.8% and 6.9%.
The quarterly growth rate coming out of this recession have relatively weak at 5.4% (Q4 2009), 3.0% (Q1 2010) and an estimated 2.5% (Q2 2010), and there as now signs the growth rate will be even lower in Q3 of 2010.
The slow down and the fact this economic recovery has been riddled by this and that debt crisis is not a surprise to me (click here)
or anyone else who has taken a macroeconomic course. For too long, far too many individuals, companies and governments in this country have outspent and made too many promises for their income. To make of the difference, there has been too much borrowing, and tax rates and have been raised too much. The high levels of debt payments and too high of tax rates is slowing spending and investment and economic growth is being strangled.
Additionally, bank executives got the scare of their lives, so banks are reluctant to lend even to qualified borrowers and this is slowing economic growth.
More of the same, longer and deeper recessions; weaker and shorter economic recoveries and expansions; weaker incomes and a lower standard of living for many.
I picture the next decade much like the last 2 or 3 years. Slow economic growth, high unemployment, and governments in deficit as the economy moves from crisis to crisis. We had a foreclosure crisis and a bank crisis. Now weaker countries are on the verge of default. Next we'll have a commercial real estate crisis, then the FDIC fund and later on a pension crisis, first with private pensions and then public pensions. This will hurt confidence and growth as the economy and the government struggle to deal with the latest financial crisis.
I think one of three things will then happen.
a) The country will continue on the same course, but will get lucky. There will be a technological leap forward that will result in a massive increase in GDP growth and that income will help service all this debt and meet the promises we have made.
b) The government will find fiscal religion and will cut spending and tax rates, and that will spur economic growth and that income and will help us service all this debt and meet our future obligations.
c) The country will continue on the same course of spending more than we earn and sooner or later one of these crises will trigger a worldwide economic collapse and an economic depression will follow. This will be accompanied by social and political unrest.
Alternative a is unlikely any time soon. We've had significant economic leaps forward but they happen about every 40 years -- industrial revolution, assembly line, jet age and use of war technology in private economy and the computer revolution. These technological leaps raise worker productivity significantly, and hence income, but the next one is due sometime in 2025 or so.
Alternative c or the status quo of more spending, borrowing, taxation and then an eventual collapse is avoidable. We need to elect leaders at all levels of government who understand finance and the problem we face; these leaders must have the ability to convey that picture to the people and the communication skills to convince the people that the short-term pain of saying "No" to more spending, borrowing and taxation is far better than the long-term consequence of worldwide economic collapse.
Unless we improve our representation in locally, in Columbia and especially in Washington, I think the decade ahead will be quite painful and unrestful for our country.