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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