The data we can trust, however-tax receipts, market-based prices, corporate and business earnings, unemployment claims-are generally agreement with the GDP stats, as I’ve been noting off and on for days gone by almost a year. The economy is most probably still growing at a sub-par speed of 2% or so, as it is wearing average since 2009 (see graph above).
Just because it’s growing gradually is no reason to be concerned that a downturn is imminent. The analogy that says a slow-growing overall economy is similar to an airplane approaching stall speed is flawed. Indeed, recessions typically follow periods of excesses-soaring home prices, rising inflation, common optimism-rather than periods dominated by risk aversion such as we have today. Risk aversion can still be found in abundance: just go through the extremely low level of Treasury yields, and having less business investment despite strong corporate profits. If Donald Trump wants to earn the election, his campaign must promote the facts found in the graph above. 3 trillion smaller than it could have been.
3 trillion per season in income, and that’s yuuge. Put another real way, the common family might have been earning about 18% more this season if the economy had recovered in typical fashion, and undoubtedly would have been a lot more people working there. 3 trillion GDP shortfall is the easiest way to comprehend the widespread level of discontent in the U.S. As I mentioned some years back, all the spending and borrowing that was likely to “stimulate” the economy from 2009 was essentially flushed down the bathroom.
Since 2009 we’ve conducted a lab experiment in the power of authorities spending and income redistribution to grow the overall economy by stimulating demand, and the effect is proof that Keynesian ideas are destructive, not stimulative. Neither federal government spending nor easy money gets the power to create development out of thin air, but politicians want to encourage you that they do.
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The economy is weak today because we have lost many trillions of dollars on transfer payments that only create perverse incentives to work less. Hillary Clinton will not understand why, but Donald Trump probably does. Clinton has vowed to “change” things for the better by increasing taxes on the wealthy and profitable, and distributing the spoils to the center class.
But that is simply a rehash of most that went wrong for the past seven years. Real change needs taxes reform and simplification; lower and flatter marginal tax rates; a much lower corporate tax; and comprehensive regulatory reform and relief. We have to increase the after-tax incentives to work and undertake risk, and reduce regulatory burdens (which add immeasurably to the price of doing business), if we wish a stronger economy.
3 trillion annual shortfall in the economy’s productive capacity. The upside potential laying dormant in the current overall economy is staggering. One of the best things about the past two decades is the effectiveness of corporate earnings, as illustrated in the graph above. From 1958 through the middle-90s after-tax corporate and business profits averaged about 5% of GDP (remember that the right y-axis, corporate and business income, is 5% of the left y-axis, nominal GDP). 6.8 trillion. That means that, in effect, our government has lent 2 out of every 3 dollars of corporate and business profits for days gone by seven years, and then handed the amount of money out to favored constituencies.
In return, the national authorities has enjoyed the lowest borrowing costs in history, but the economy has squandered much of its scarce resources. We’ve plowed two-thirds of the profits of the most valuable companies in the world into (mostly) transfer payments that have generated zero net growth. This recovery has seen a colossal waste of money.
Another way to see this is to check out business investment, which includes been miserable for many years. Businesses have been very profitable, but also for whatever reason (e.g., the best corporate tax rate in the developed world, which has discouraged businesses from repatriating trillions of dollars of abroad profits) they have been extraordinarily hesitant to reinvest those revenue.
Call it risk aversion, or as I’ve considered it, the reluctant recovery. Capital goods orders (see chart above) are a good proxy for business investment. Capital goods will be the ordinary things that make labor more effective. You can’t grow the economy without buying tools and technology that produce workers more productive. Lamentably, capital goods orders today are about the same as these were in the late 1990s. In real terms they have declined by 30%, even though the economy is continuing to grow by over one-third over the same period.