Sunday, October 18, 2015

What a 2% Differential in Annual Economic Growth, Plus or Minus, Will Mean to America's Future ... Government 'Help' Isn't Helping

Our American economy has been in a slow growth economic rut for several years, and it shows no signs of picking up the pace in a significant and lasting way anytime soon.

The facts are clear: we used to show real growth of approximately two full percentage points higher than we have for the past several years. 2% annually may not sound like much, but it's a definite game changer when its effects are properly considered over time.

In effect, it amounts to a future American economy where our kids and grandkids will have only one small pizza to slice into several pieces instead of having four equally sized pizzas to slice into as many pieces as they choose. Slicing one pizza of any size into four, eight or sixteen slices doesn't make the pizza any bigger, and the same is true for the size of our overall U.S. economy. Government growth and more income redistribution programs won't make the economic pie any bigger. It will just make each piece smaller. What we really need are more pies in the oven.

If the economy over time grows at its historical rate of 3.7% annually, that's a full two percentage points higher than the current and well established stuck-in-the-mud 1.7% annual rate of growth. And while a 2% annual difference may not seem like much, it's actually a big time game changer when measured over several decades.

Over ~40 years it's the difference of having twice as much versus half as much 'pie' for today's young Americans to share. And over a lifetime of ~80 years, the size of the 'pie' to share will be four times larger in an economy growing at an incrementally higher annual rate of 2%.

To repeat the obvious, the legacy to future generations of an economy which grows at 3.7% instead of 1.7% annually is huge.

The Politics of Distrust is subtitled 'What explains the weird unpredictability of the 2016 presidential race? An anemic economy that has Americans questioning incumbents, doubting experts and worrying about their own prospects.' It says this in pertinent part:

"We live in extraordinary and distressing political times. The elected branches of the U.S. government seem paralyzed, incapable of governing except to avert crises. The president accuses his opponents in Congress of virulent opposition to even the most common-sense measures, while they accuse him of trampling the Constitution. Voters outside the Beltway are totally dispirited, and insofar as they are engaged in the political process, they are increasingly drawn to flamboyant populists of the left and the right, who make wild promises that cannot possibly be fulfilled.
Until quite recently, our politics seemed to function much more smoothly. Most adults can remember a time when government actually seemed to work. Now we all struggle to explain what has gone wrong.

This dim view of the present situation doesn’t improve when compared with previous generations. In 1964, the American National Election Study found an impressive 77% of Americans trusting government to do the right thing most of the time or even all of the time. That number fell as a result of Vietnam, Watergate and the economic stagflation of the 1970s. The economic boom of the 1980s and 1990s restored public faith to some degree, and as of 2002, 55% of Americans generally trusted government. But lately, that number has been in free fall, with just 22% trusting government in 2012....

Since 2005, according to Gallup, Americans have overwhelmingly thought that the country has been headed in the wrong direction. Gallup also finds a notable slide in public approval of our major institutions. Between 2000 and 2015, the favorable rating of Congress has declined by 18 points, the presidency by 16 points and the Supreme Court by 17 points. Business and banks have done no better, dropping by nine and 15 points, respectively. . . .

The recession of 2001 was mild, but the growth that followed it was lackluster. The recovery from the Great Recession has been weaker still.

All told, the average annual growth rate over the last 14 years has been less than half of its previous postwar average—an anemic 1.7%. Even the stagflation of the 1970s wasn’t nearly so bad, and it was bookended by strong growth in the 1960s and 1980s.

This difference between 3.7% and 1.7% may not sound like much, but it implies trillions of dollars in unrealized growth. The middle class has felt its absence keenly. Average real wages and salaries for private-sector workers have barely improved over the last decade. And the Census Bureau recently noted that the median American male worker has seen no real wage growth in 40 years.

The slowdown has hit the working class especially hard. The employment level for those without college degrees has fallen much faster than for those with colleges degrees, and job losses have been particularly acute in manufacturing and construction.

All this suggests an economic bifurcation reminiscent of “A Tale of Two Cities”: Those on the higher end of the socioeconomic scale are doing all right, but those on the lower end cannot get the sorts of jobs that let prior generations rise into the middle class. . . .

The tonic to this situation is as obvious as it is elusive: economic growth that approximates the levels of the late 20th century. For now, that should be the priority of both parties. Whatever its faults, the postwar political consensus was the most durable and productive in American history, and there is no obvious alternative to it. If the country can somehow find its way back to 3% growth, look for our problems to ease over time. If not, look for the nation’s anxiety to persist, and even worsen."

Summing Up

A rising economic tide will indeed lift all boats.

But when it comes to pursuing economic growth, job growth, financial opportunity and security for all, having government bureaucrats and politicians at the helm will bring Americans no good answers.

It's not the Fed, not the Congress, and not the President that can do the heavy economic lifting. It's the participation of free-to-choose willing participants and investors in the private sector.

Yet the private sector is becoming a smaller part of America's economy as a result of our ever growing cumbersome and bureaucratic government.

In addition, American domiciled business operations are also becoming fewer in number as a result of stiff and low cost global competition. Yet our government gurus continue to conduct 'business bashing as usual.'

It's time to stop bashing American business, and to stop relying on government (including the Federal Reserve) to fix problems they can never fix.

But will populist politicians ever choose to actively support a resumption of the historical rate of economic growth in America?

Or will they continue to bash business while implementing temporarily popular but unaffordable and unfunded growth inhibiting entitlement programs?

All in all, it's hard to be optimistic about restraining the ever growing dominance of the populist public sector.

The plain fact is that too many of We the People choose to believe the dishonest but 'feel good' populist political spin and garbage.

That's my take.

Thanks. Bob.

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