Friday, October 12, 2012

Guest Post: Are you better off?

The American Economy: Then and Now
by Samuel L. Skogstad, Ph.D.
October 9, 2012

In next month’s presidential election the voters face two candidates with strikingly different visions of the American economy, how it works and how its course should be influenced by government policy.  Democrats and Republicans seem to agree that a central question Americans will be answering with their votes is this: “are we better off now than we were four years ago?”

In this note we review the economic outcomes over the past eight years in three areas that are central to the evaluation of how “well off” we are as a nation: (1) jobs and employment opportunity; (2) Income (GDP) and its growth; and (3) government budget management, deficits and the national debt.  We conclude with a fourth section (4) which comments on the conduct of government economic policy.  These four areas were chosen in the belief that they are among the very highest priority concerns of all voters. 

1. JOBS AND EMPLOYMENT.   This comparison is very straight-forward.  By the measure of employment opportunity, the situation as of September 2012 was worse, by a staggering margin, than it was in September 2008.      

The data in the table below show an increase of 11 million in the working-age population over          this period.  Ordinarily, 6 to 7 million of these would have found jobs.  But in this interval, there were no new jobs, and in fact our economy lost over 2 million jobs that existed in September 2008.

                                 Table 1: Employment and Working-Age Population

                                                                        Bush                               Obama                                                                            
                                                                    (September 2008)         (September 2012)  
          Number Employed (millions)                  145.1                                143.0
          Population (16yrs+) (millions)                 234.4                                245.3   
          Employed as % of Population                   61.9                                  58.7

Thus the effective jobs shortage as of last month was over 8 million. (i.e. 6 million or more  new job seekers and two million jobs eliminated.)

 One can, of course, hope for significant improvement in the future. Nevertheless there is no honest way to reconcile data showing 11 million more working-age people and 2 million fewer jobs, with a story of being “better off.”

1. Income, Production and Growth.  Our population has added well over 10 million people in the past four years.  Of course all age groups are represented (though in varying proportions) in the growth, and all must be supplied with the goods and services to feed, house, clothe, educate and otherwise nurture them.  Even if Americans aspired to no improvement at all in per capita incomes, positive GDP growth would be required to meet the needs of the growing population.  Thus macroeconomic performance must be evaluated in the context of population growth.  (This GDP/Population relationship is shown in Table 2 below.)
In 2005 and 2006, aggregate production grew over three times as fast as the population (which grows at just less than 1 percent per year).  In 2007, evidence of a significant slowdown in production appeared, and December of that year is marked as the beginning of the 2007-2009 recession, the first downturn in 81 months.  The unemployment rate was 5.0 percent at that time, and real GDP managed 1.9 percent growth for the full year. 

But from mid-2008 to mid-2009 the recession was devastating.  Real GDP dropped steadily to an annual rate $600 billion (4.6 percent) below its value in the second quarter of 2008.  The unemployment rate jumped from 5.5 percent to 9.5 percent. On a per-person basis, real GDP fell over 5 percent. 
It is worth noting that the first quarter of 2009 ended the significant reductions in real GDP (hence the smaller decline shown in Table 2 below for 2009 GDP.)  The second quarter GDP was 99.9 percent of the first quarter value.  Thus in terms of real GDP alone, President Obama entered office just as the contraction was ending.  The most urgent economic problems his administration faced therefore were: (1) to encourage and support job creation and a broadly-based recovery of GDP growth; and (2) to take swift action to gain disciplined control of the federal government budget and the national debt.  As his term ends, neither of these accomplishments can be claimed.

                                    Table 2.  Value of U.S. Production of Goods and Services (GDP)
                          (Annual Data, 2005-2011, Quarter II for 2012.  Dollars Amounts in Billions)
                                    2004      2005       2006       2007      2008      2009      2010      2011      2012
TOTAL REAL GDP   12,247   12,623    12,958   13,206   13,162   12,758   13,063   13,299   13,549
Percent Change               3.5          3.1           2.7          1.9         -0.3        -3.1         2.4         1.8          1.3
 PER CAPITA GDP                                                    (In 2005 $)
                                 41,618    42,505   43,370    43,683   43,729   41,370    42,091   42,572   43,143
Percent Change                        2.1          2.0           0.7          0.1         -5.4         1.7          1.1          1.3                                                              
                                      GDP in PREVAILING CURRENT PRICES                                                                                                                                                                                                       
TOTAL GDP            11,853    12,623   13,377   14,029    14,291   13,974   14,499    15,076     15,586 
% Change                   6.4          6.5          6.0         4.9             1.9        -2.2         3.8          3.9            3.4 

Source: U.S. Department of Commerce, BEA, NIPA Tables1.1.6 ( Updated September 27, 2012 for GDP.  BUCEN for population data.

Real GDP declined slightly in 2008, and then very dramatically in 2009.  In 2010 there was a spurt of growth (2.4 percent) though the pace slackened to 1.8 percent in 2011 and further to 1.3 percent in 2012. GDP did recover its 2007 level in 2011, and is now above that mark.  Nevertheless, on a per capita basis, it is still $600 below the 2008 high.  With the real growth rate falling, there is little on which to base optimism for a continued or stronger recovery.

3.      Managing the National Budget, the Deficits and the National Debt.  The key measures of the government’s management of the public finances are its yearly budget deficits, and the resulting changes in the national debt.  Over relatively short periods, a government may have little ability to control these flows.  However, over a full four-year term, any administration must accept responsibility for its own fiscal management, regardless of the situation it “inherited” from its predecessor.

A.  The Deficits.  Focusing on deficits, we see that the maximum reached during President Bush’s last term was one-half of one trillion dollars in FY 2008.  This represented 3.8 percent of GDP, a key component of the nation’s “ability to pay.”   For FY 2009, during which President Bush was in office for three months and President Obama for 9 months, the deficit peaked at a record-breaking 11 percent of GDP.

                           Table 3. U.S. GOVERNMENT BUDGET MANAGEMENT
                                                     (In Trillions of Dollars)
       THE BUSH YEARS                                                         THE OBAMA YEARS              
                                             Surplus (+) or                                                                      Surplus(+) or
         Receipts     Outlays       Deficit (-)                                      Receipts     Outlays       Deficit(-) 
                                            $     %GDP                                                                       $       %GDP
2004    1.9        2.3            - 0.4      3.3              2008                2.5              3.0          -  0.5       3.8
2005    2.2        2.5            - 0.3      2.4              2009                2.1              3.5           - 1.4     11.0
2006    2.4        2.7             -0.2      1.6              2010                2.2              3.5            -1.3     10.0
2007    2.6        2.7             -0.2      1.5              2011                2.3              3.6            -1.3       9.8            
2008   2.5         3.0            - 0.5      3.8              2012                2.5              3.8            -1.3       9.6
Source: U.S. Department of Commerce, Bureau of Economic Analysis (BEA), Public Web Site.

If we consider the budget outcomes for the entire period 2004 to 2008 (the Bush Administration), we find that the average of the annual budget deficits was 2.5 percent of GDP.  Adding in FY 2009, the average rises to only 3.9 percent of GDP.  This contrasts sharply with the record of the current (Obama) Administration.  Considering only the fiscal years 2010 through 2012 the responsibility of the Obama Administration, the average annual deficit is 9.8 percent of GDP.  The apparently low priority in the past four years of sound budget management, has created such a national debt that it portends ever increasing difficulty in managing future budgets.  The failure of the Administration to craft a budget acceptable to either party contributes to the fiscal stress our country now faces.  

To hope that the future will be better is natural.  But to expect that hoping it will make it so is not a promising strategy.  As for the facts right now, they make it clear that we, as a nation, are not better off with current fiscal management strategies than we were with those of four years ago.
B.  The National Debt.  This too is a very short story in terms of the question “are we better off now than we were four years ago?”  At the end of the Bush Administration, our government owed our creditors $10 trillion (the value 7 months of this year’s total GDP.)  Today we owe a little over $16 trillion, an increase of 60 percent, and more than the value of a full year of our nation’s total production of goods and services (GDP).  In each of the four years ending last month, government outlays have far exceeded revenues, and the sizes of these deficits---both in dollars and as a percentage of the national economic “pie” (GDP) are rarely seen in peace-time American economic historyIn the past four fiscal years, the U.S. Government  paid out over $15 trillion, though its receipts of tax and other revenue was “only” $9 trillion. The difference is approximately the amount that has been added to our national debt.

4.  Comments on Government Economic policy management.  Economic outcomes can be influenced by government economic policy, most particularly in the short-term.  The outcomes presented above are quantified and hence are subject to little dispute.  As President Clinton famously declared in his Democratic Convention speech, “the numbers are what they are, it’s just a matter of arithmetic.”  In this section, we offer a brief commentary on the connection between the observed outcomes and government policy.
As noted earlier, the recession of 2007 to 2009 was almost over when President Obama took office.  Thus his greatest economic challenge was to use the tools of economic policy at his disposal to ignite and sustain a vigorous recovery.  While a sluggish increase in GDP and employment has begun, it has for the better part of the past two years become more sluggish.  GDP per person and employment both remain below their levels when President Obama took office.  The national debt has soared 60 percent and annual deficits under his administration (10 percent of GDP) have been double the share of GDP that most economists would consider acceptable, and more than double those of the previous 4 years.  Thus it is perfectly appropriate to ask why this Administration has not been able, in almost four years, to ignite a recovery.

There are two contributing factors relating to government anti-cyclical economic policy.  First, although total budgetary outlays and deficits increased significantly after 2008, the share of those outlays going to purchases of goods and services declined as transfer payments increased.  This is seen in the GDP accounts which show very small increases in the Government Spending component of GDP.  A second contributing factor was the government’s use of appropriated “economic stimulus” funds for such projects as promoting alternative energy sources (e.g. making gasoline out of corn) and high-speed rail transportation.  Both categories of projects use relatively little labor, and have relatively long gestation periods.  Neither characteristic is conducive to prompting recovery from a cyclical downturn.
Fundamentally, the policy preferences revealed by the Obama Adminsitration show a lack of confidence in free markets to produce efficient and equitable economic outcomes.  The Republican candidate, on the other hand appears to  see private markets as the appropriate default mechanism for allocating resources and distributing income.  However, this vision also includes government standing ready to “referee” the system, fill in where markets are ineffective, and provide an environment hospitable to economic innovation and growth.  In next month’s presidential election, the voters will have an opportunity to cast a vote for whichever of these visions best represents their own views on the matter.

Samuel L. Skogstad is Professor Emeritus and
Retired Chairman of the Department of Economics
At Georgia State University.  He is also a retired
Senior Foreign Service Officer of the United
States Agency for International Development,
where his last assignment was as Director of
Economics in the Bureau for Eastern Europe and
the Republics of the former Soviet Union.  He
resides in Sarasota, Florida. 

1 comment:

  1. Hi Sam!, I just found this article after searching for you on the web. I wish I had read up on this before the election; It's challenging to find informed sources to trust. // I hope you are well!
    ~ Cindy from GSU/AYSPS Dean's office