The Keynesian Growth Discount
The results of our three-year economic experiment are in.
For three long years, the U.S. has been undertaking an experiment in economic policy. Could record levels of government spending, waves of new regulation and political credit allocation, and unprecedented monetary stimulus re-ignite growth? The results have been rolling in, and they represent what increasingly looks like an historic mistake that deserves to be called the Keynesian growth discount.
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The latest evidence is yesterday's disappointing report of 1.8% in first quarter GDP. At this stage of recovery after a deep recession, the economy is typically growing by 4% or more as consumer confidence returns and businesses accelerate investment as their profits revive. Yet in this recovery consumers are still cautious and business investment remains weak.
Some of the first quarter's growth slump is due to seasonal factors such as bad weather and weaker defense spending. In the silver lining department, the private economy grew faster than the overall GDP figure because government spending declined. But even maintaining the 2.9% growth rate of 2010 would mark an historic underachievement for a recovery after a recession that was as deep as the one from late 2007 to mid-2009.
The most recent recession of comparable depth and job loss was in 1981-1982, when unemployment hit 10.8%. Huge chunks of industrial America shut down and never re-opened. Yet once the recovery began in earnest in the first quarter of 1983, the economy boomed. As the nearby table shows, growth exceeded 7.1% for five consecutive quarters, and it kept growing at nearly a 4% pace for another two years. Growth didn't dip below 2% in any quarter until the second three months of 1986. This was the Reagan boom.
Now look at the first seven quarters of the current recovery. Only briefly has growth hit 5%, in the fourth quarter of 2009 as businesses rebuilt inventories that had been pared to the bone. Growth has been mediocre ever since, sputtering to a near-stall in the middle of last year, accelerating modestly late last year, and now slowing again. This recovery is as weak as the much-maligned "jobless recovery" of the last decade, which followed a mild recession and at least gained speed after the tax cut of 2003.
Most striking is that this weak growth follows everything that the Keynesian playbook said politicians should throw at the economy. First came $168 billion in one-time tax rebates in February 2008 under George W. Bush, then $814 billion more in spending spread over 2009-2010, cash for clunkers, the $8,000 home buyer tax credit, Hamp to prevent home foreclosures, the Detroit auto bailouts, billions for green jobs, a payroll tax cut for 2011, and of course near-zero interest rates for 28 months buttressed by quantitative easing I and II. We're probably forgetting something.
Imagine if President Obama had introduced his original stimulus in February 2009 with the vow that, 26 months later, GDP would be growing by 1.8% and the jobless rate would be 8.8%. Does anyone think it would have passed?
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