The New GDP Numbers And What They Tell Us

by: John M. Mason

The initial estimate of real GDP growth in the United States for the second quarter over the first quarter was 1.7 percent. However, the year-over-year growth of the economy was only 1.4 percent, up slightly from a 1.3 percent, year-over-year rate of growth in the first quarter of the year. Real economic growth in 2012 was higher, but only at a 2.8 percent year-over-year rate.

Not a very pretty picture.

There is universal concern about the growth rate of the United States economy from the President on down. The Federal Reserve has put a positive spin on the current numbers but still wants to continue buying $85 billion in securities every month in an effort to spur the economy along toward a faster pace of growth.

The problem is seen as a cyclical problem. That is, the United States economy ended its "Great Recession" in July of 2009 and has been growing ever since. The only comparisons that are made are when analysts compare this recovery with other business cycles and claim that this has been the weakest post-World War II recovery on record.

Their question ends up to be, "How can we stimulate the economy so as to accelerate economic growth?"

My concern is that the problems that we are facing in attempting to achieve faster economic growth are not all of a cyclical nature. If we look at the figures on the growth rate of real Gross Domestic Product we see that we are certainly rising out of a recession. But, we also need to face the fact that the peak of economic growth rising out of a recession has been declining since the 1960s.

There is, of course, one exception to this statement and that occurred in 1984. Growth rate in that year was 7.3 percent, but that occurred after Paul Volcker and the Federal Reserve had reduced the rapid inflation that grew out of the late 1970s and President Ronald Reagan had cut taxes so as to spur on the economy.

Otherwise, the trend has been downwards. Economic growth reached a peak in 1966 of 6.6 percent. The next peak came in 1973 at a 5.6 percent rate of growth. This same growth rate was reached again in 1978. The next peak growth rate did not come until 1999, but the peak level of growth in this cycle was only 4.8 percent. In 2004, the year of the next peak, real GDP only rose at a 3.8 percent annual rate. As mentioned above, the peak rate of growth achieved in the current upswing is 2.8 percent.

We could also measure how slow the economy grew at the bottom of economic cycles and we would get similar results. That is, the growth rate of the economy at the trough of business cycles since 1961 has been at lower and lower numbers.

In other words, there has been a secular decline in economic growth since the beginning of the 1960s.

My argument is that the underlying economic policies of the United States government, whether led by Republicans or Democrats has been to almost continuously stimulate the economy so as to keep unemployment rates as close as possible to "full employment"…however that is defined.

The economic polices have been derived from the Keynesian macroeconomic model and have been expanded to operate almost continuously rather than just cyclically in order to combat swings in the business cycle. Politicians, it seems, like to get re-elected and have become convinced that being able to say that they have worked to keep voters employed is one of the best ways to get re-elected. Greedy bastards.

However, it seems as if there are some "unintended consequences" to this approach is that the capacity utilization of manufacturing facilities has also suffered a secular decline and that the under-employment of the labor forces has achieved a secular increase. It seems as if trying to keep a large portion of the labor force employed in the jobs they held before a business cycle resulted in higher levels of the unemployment rate has had longer-term outcomes that were not expected. Furthermore, trying to force these workers back into the same factories they worked in before their unemployment has not seemed to work as well. (For more on this see this post and also this one.)

Economic theories are going to have to change before economic policies will be changed. Also, politicians are going to have to start to realize that they cannot just focus on the short-run. They are going to have to start realizing that their constituents are going to be better off if they have the skills and the mobility to work in an age when firms have only transient competitive advantages. (See for example "The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business " by Rita Gunther McGrath, published by Harvard Business Review Press, 2013.) In such a world, things are always changing and where they happen also changes.

After losing a job, going back to work at that same old job is becoming less and less of an option. Politicians are going to have to understand that in this information age, things are changing all the time and the economy must have a workforce that is educated and trained to change throughout the careers of each individual. The problematic aspect of this for the politician is that to achieve this standard for the workforce it is going to take a time period in excess of the next election.

Furthermore, it is going to take a regulatory environment that is supportive of this change rather than restrictive. Just pouring billions and billions of dollars into the economy, either from the government in terms of more and more debt or from the Federal Reserve in terms of more and more liquidity, is not going to produce the result the politicians desire. The last fifty years is strong evidence of this. Furthermore, just pouring billions and billions of credit into the economy is just going to continue to underwrite the wealthy. The wealthy, or those that can act like the wealthy, know how to take advantage of the government credit inflation described above. I have written many posts about how credit inflation has been used by the wealthy and is being used by the wealthy so that a large portion of all the money and debt being created by the government works through the financial circuit and not through the sectors of the economy that produce real goods and services.

Therefore, I do not expect the pick up in economic growth over the next few years that many other economists expect. These other economists want more economic stimulus and they want it now so that the economic expansion will pick up steam. If the major problem is a structural one, like I believe it is, credit inflation will not resolve the issue…we need longer run solutions. I believe that the evidence of the past fifty years proves this point. Unfortunately, I am not convinced that the government - or the electorate - are in any mood to be patient and put into place policies that will really produce the faster growing economy that everyone wants.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.