The Biggest Reason For Weak Economic Growth

by: Steven Hansen

Have you ever wondered why the recovery from the Great Recession is so weak? We hear a calliope of reasons including:

  • too little investment
  • too small government stimulus
  • too much debt

Based on change in both population and jobs - the American economy is short 16 million jobs since the beginning of the Great Recession - the graph below zeroes in on the relationship between population and jobs to the beginning of the recession.

One should note that the progress made to date is that the jobs situation is not worsening. But what effect does 16 million jobs have on the economy? In 2009, the median family income expressed in 2009 dollars was $49,777. In 2009 there were 117,538,000 households, and the end of year population was 308,633,000 - which puts the median income per capita at $18,957 (2009 dollars) or roughly $17,000 (expressed in 2005 dollars - Real GDP is chained 2005 dollars).

This lack of 16 million jobs shorts Real GDP by $260 billion. Note that this is a back-of-an envelope calculation that ignores taxes (the government takes but also re-spends), savings, and economic multipliers. I am suggesting this $260 million shortfall is very conservative, and easily with multipliers could be more, perhaps more than double.

Real Inflation Adjusted GDP (red line) and Blue Line Shows the Minimum GDP Had There Not Been Any Job Losses

If the government could have found a way to create jobs, the recession would have ended sooner and the economy would have been fully recovered per capita by 2012.

Real Inflation Adjusted per Capita GDP (red line) and Blue Line Shows the Minimum per Capita GDP Had There Not Been Any Job Losses

The government needs to foster job growth. The major reason the economy remains weak is that too small of a percentage of the population has a job. The USA is a consumer consumption based economy. Without re-gearing to a different economic model, true economic expansion cannot occur until jobs are created putting more money in the hands of the consumer.

Yet, how do (government) economists believe jobs are created? Should they trickle down some money from government either directly or indirectly (through incentives to business)? Seriously, does anyone still believe trickle down anything is a solution? And how has the Federal Reserve's "dual mandate" monetary policy done in creating jobs? The Fed is taking credit that their monetary policy is working. If one is happy that the jobs situation is not getting worse, then the Fed's policies are working.

It is no secret small businesses (less than 500 employees) drive jobs growth. What has been done to stimulate this small business jobs incubator? Obamacare? Minimum wages? Tort laws? Regulations that only the big corporations can cost effectively comply? Complicated tax codes? Unfortunately there is no real time data on small business starts and death to develop tools for lawmakers to use to make decisions on how to grow this sector. But the little evidence available since 2000 shows a deteriorating trend in the number of small business starts, and a decline of small businesses in general.

The chicken or egg question of the day - Is the weak economy creating the low employment, or are the low employment levels causing the weak economy? Are the business start-ups "too-small-to-succeed"?

My normal weekly economic wrap-up is in my instablog - the subject being the deflationary trends.

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. I have no business relationship with any company whose stock is mentioned in this article.