30 abril, 2013

The Growth Deficit

A modest first-quarter rebound, but not enough to lift the middle class.

The U.S. economy hit a new milestone in the first quarter of 2013: Annual output of goods and services eclipsed $16 trillion. The 2.5% growth pace in GDP through March seems like a wild night on the town after the 0.4% slog at the end of 2012.
That's the good news. The bad news is that this recovery is still half the pace of the normal expansion. The Joint Economic Committee reports that if the economy had grown at the typical pace coming out of recession, at this stage GDP would be closer to $17.4 trillion. This $1.4 trillion growth deficit is roughly the size of the combined annual production of Michigan, Ohio and Pennsylvania in 2011.

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Editorial board member Steve Moore on the first quarter’s 2.5% GDP growth. Photo: Getty Images
Brendan Conway joins the News Hub to discuss disappointing results in the first quarter GDP. Photo: Getty Images.
Consumer spending drove about 90% of the GDP growth in the quarter with an assist from a long-delayed but robust housing recovery (12.6% in the last quarter on top of 12.1% growth in 2012). One disappointment was the humdrum 2.1% pace of business spending on plant, machinery and computers. Business spending is one of the best predictors of future hiring and wage increases, so this suggests continued tough times for workers ahead.

The national income data, also released on Friday, explain a lot about the initial impact of the tax increases that hit in January. By the middle of last year, the White House made it known that it would insist on letting the Bush era tax cuts on dividends, capital gains and personal income rise for individuals earning more than $200,000. The health-care law also raised payroll taxes by another 0.9% on higher income earners, on top of the two-percentage-point increase that hit all wage earners.
The result seems to have been one of the largest shifts in the timing of income in American history. From the third to the fourth quarter of 2012, personal income soared by $262 billion despite anemic 0.4% GDP growth. Then in the first three months of 2013 incomes fell $109 billion.
Some of the first quarter's decline in personal income (about $30 billion) was due to the expiration of the payroll tax holiday in January. But individuals and businesses clearly accelerated income into 2012 to evade the higher tax rates arriving in 2013.
This effect is evident in reported dividend income. That figure rose to $862 billion in 2012's fourth quarter as many corporations cut special dividends at the end of the year to pay the expiring 15% dividend tax rate. In the first three months of this year, dividends fell to $740 billion even as the tax rate rose to 23.8%. Those who claim that taxes don't affect behavior should explain that one.
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A family in the working class section of Utica, New York
The dividend and personal income windfall from late last year may partly explain the healthy increase in consumer spending in January and February despite the big payroll-tax increase. Consumer spending wasn't as robust in March, and the longer-term worry is that higher tax rates on business and investment income will dampen economic activity and funding for new enterprises.
It's been 15 quarters since the economy hit its recession trough in June 2009. The growth rate (on an annual basis) has since averaged 2.1%, or half the 4.4% average rate of the past nine recoveries. The Reagan expansion averaged 5.3% through the same 15 quarters, according to the Joint Economic Committee. The current expansion's subpar growth performance explains why unemployment remains so stubbornly high and median household incomes after inflation are nearly $3,000 below where they were when the recession ended.
The White House was quick to blame the spending sequester for deterring faster growth. Chief White House economist Alan Krueger warned that the sequester's "arbitrary and unnecessary cuts to government services will be a headwind in the months to come, and will cut key investments in the nation's future competitiveness."
The reality is that government spending did decline by 4.1% in the quarter, and this shaved 0.8% off a GDP calculation that counts government spending as a plus no matter what it is spent on. But 75% of those federal cuts were in defense, which the White House wants to cut. When defense spending fell during the 1990s, GDP still rose at a faster pace because private growth was so much stronger.
What we are experiencing now is not some "austerity" shock but a slow downward adjustment in government spending to a still high 22.7% of GDP from the unprecedented high of President's Obama's first term average of 24%. Those spending levels weren't sustainable, unless you want to send federal debt as a share of GDP even higher than the 76.6% it is expected to reach this year.
We are now in year five of what has been one of the great experiments in Keynesian economic policy. We were told that if Congress would spend $830 billion more temporarily, and the Federal Reserve would unleash monetary policy, a recovery would begin and rapid growth would resume. Larry Summers, Alan Krueger, Jared Bernstein and their allies on Wall Street got their policy wishes. Their economy has delivered mediocre growth and declining middle-class incomes—though we will concede that the wealthy have done well as the stock market has recovered.
So now the same Keynesians say the spending blowout wasn't large or long enough, taxes still aren't high enough, and monetary policy hasn't been easy enough. What this economy really needs is a statute of limitations on intellectual denial.

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