Why the Great Recession Continues

by: Howard Richman

A depression continues until real GDP surpasses pre-depression levels and keeps rising. The United States did not climb out of the Great Depression until 1939, though it almost climbed out in 1937 as shown in the graph below:


Similarly, the United States is still locked in the Great Recession and will not be out of it until it surpasses the level Real GDP reached in the fourth quarter of 2007, as shown in the graph below:


The preliminary results for Real GDP for the third quarter of 2010, just released on October 29, show why the American economy is staying in the Great Recession. The growth in real GDP was just 2.0% due to the growing trade deficit subtracting a full 2.0% from GDP growth. The components of GDP growth were the following:

Component Contribution to Growth
Consumption 1.8%
Fixed Investment 0.1%
Government Purchases 0.6%
Inventories 1.4%
Foreign Trade -2.0%
Total 2.0%

As can be seen from the table, consumption spending contributed 1.8% to GDP growth and inventories, perhaps due to businesses stocking up on commodities, contributed 1.4% to growth, while the trade deficit subtracted 2.0% from U.S. economic growth. If not for the growing trade deficit, U.S. economic growth would have been 4.0%.

The results for the second quarter were quite similar. Total growth in GDP was 1.7% with the growing trade deficit subtracting 3.4% from economic growth. If not for the growing trade deficit, U.S. economic growth would have been 5.1%, and President Obama would have had the "recovery summer" that he needed in order to preserve his party's majorities in the House and Senate.

The current Congress's decision to tolerate growing trade deficits has kept the United States in a depression since the fourth quarter of 2007. If polls are correct, the electorate is about to throw enough incumbents out of office to greatly change the congressional makeup in 2011. Hopefully, the new Congress will pass a scaled tariff to balance trade and get us out of this depression. If not, then they will deserve to be thrown out of office in 2012.

But it would be wrong to just blame Congress. The President has the authority to impose tariffs without even being required to consult with Congress. And the Federal Reserve is busy producing inflation to reduce American savings, when it should be advising Congress and the President to reduce the foreign savings that pour into this country with our trade deficits. The scaled tariff would increase American exports and reduce American imports. But they prefer budget deficits and inflation. Our economic leadership is overflowing with incompetence.

Disclosure: No positions

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