During the postwar period up to the current recession (1947-2007), the average annual growth rate for the U.S. was 3.4%. The last three decades have experienced somewhat slower growth than the earlier periods, but even in the period 1977-2007, the average growth rate was 3%. According to the National Bureau of Economic Research, the recovery began in the second half of 2009. Since that time, the economy has grown at 2.4%, below our long-term trend by either measure. At this point, the economy is 12% smaller than it would have been had we stayed on trend growth since 2007. Worse, the gap is growing over time. Today, the economy is four percentage points further from the trend line than it was the first quarter of 2009 when this administration's nearly $900 billion fiscal stimulus efforts began. If forecasts of around 2% growth turn out to be accurate, we will add to that gap this year.
Brad does not buy this 3.4% per year increase in potential real GDP, which is not consistent with what CBO is telling us. Using the FRED database, one can calculate the percentage difference between CBO’s measure of potential GDP versus actual GDP. By mid-2009, this gap had grown to 7.4%. Since then it has slowly declined to around 5.5%.
But hey – we are indeed far from full employment in my opinion. Item #2:
Are there other factors that may have contributed to the slow recovery that we are experiencing? It would be difficult to argue that government polices over the past three years have enhanced confidence in the U.S. business environment. Threats of higher taxes, the constantly increasing regulatory burden, the failure to pursue an aggressive trade policy that will open markets to U.S. exports, and the enormous increase in government spending all are growth impediments. Policies have focused on short-run changes and gimmicks—recall cash for clunkers and first-time home buyer credits—rather than on creating conditions that are favorable to investment that raise productivity and wages.
Aha – the standard GOP talking points! What enormous increase in government spending? Excuse this Keynesian for suggesting that we’ve had too little fiscal stimulus.