Why won’t you talk to me? I feel like I’m drowning. You never talk to me. You know I can’t breathe now. What are you thinking? We’re going nowhere. What are you feeling?
We’re going nowhere. This stanza from Pink Floyd’s 1994 Division Bell Album was written by David Gilmour, Richard Wright and Polly Samson. Gilmour is quoted as saying that the song is a wish that all problems can be solved through discussion; however, I see it as a prophetic look at the post 2007 economy.
A few days ago, the New York Federal Reserve lowered its forecast for economic growth to an annualized rate of 1.9 percent for the second quarter, and just 1.5 percent for the third quarter of 2017. This follows an adjusted annualized growth rate for the economy of 1.2 percent in the first quarter. As Pink Floyd might say – We’re going nowhere.
These are truly dismal numbers, and while the New York Fed is more pessimistic than many forecasters, it is much more optimistic than we have been. The US Economy has been out of recession (at least according to the statistics) for 31 quarters, even though two of those quarters say negative growth. This is about as long as the growth cycle of the 1990s and almost as long as the growth cycle of the 1980s following the Reagan tax cuts. This is why we have forecast that there should be a recession happening about now. Simply put, there has been nothing within the economy itself to suggest that this should be a particularly long business cycle. There have been no new major technological advances, there has been nothing that the last three administrations have done to push forward economic growth, and many things that they have done to hamper it, workforce participation has been lagging as has investment in new plant and equipment.
In fact, what has been driving statistical growth in the US economy has been borrowing for current consumption, something which is unsustainable in the medium or long-term.
So why are we not yet in recession?
Well, maybe we never came out of the last one.
Let’s look at the long term trend in real GDP following the end of the Second World War. As the figure shows, GDP in real terms grew steadily at an exponential growth rate between 1947 and the beginning of 2008. There have been recessions and periods where growth was below trend, and expansions where it was above trend, but never did the overall economic growth rate stray from the trend line. This changed in 2008.
In fact, following the last recession, rather than growing exponentially, the economy has been growing at a linear rate. Actual output has been below trend for the past 9 years, and the gap is growing each quarter. Had growth continued along the post-war path, the overall economy would be nearly $3 trillion larger today (in real terms) than it actually is. Divide that by the population of about 321 million and that comes to about $9,300 more per person. In other words, had the economy continued to grow following the recession, everyone would be $9,300 richer today on average.
The economy grew at or above trend in only 7 of the past 31 quarters (23 percent of the time), and two of these were during the period of the so-called stimulus. Compare this to the prior 62 years, where the economy grew at or above trend 49 percent of the time.
This means one of two things – either the American economy changed dramatically in 2008. More dramatically than during the cultural revolutions of the 1950s and 1960s that saw the changes produced by the civil rights movements for minorities and women; more dramatically than during the Vietnam War or Korean Wars, more dramatically than during the stagflation period of the 1970s, more dramatically than during the Internet boom of the 1990s, and more dramatically than it did following the 9/11 terrorist attacks.
Or more likely, the cleansing powers of recession were not allowed to take effect in 2008 and the economy actually never came out of recession at all. This is actually quite possible. There are many theories of recession, one of which was promulgated by the economist Joseph Schumpeter, who suggested that economies grow through a process of “creative distruction.” He wrote, “If I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.” Recessions bring on the process of creative destruction by forcing the least productive firms out of business, freeing up capital, labor, management and markets for more productive firms.
When governments intervene in the economy to stop recessions, they disrupt the process of creative destruction. They keep zombie firms in business, keep wage rates too high to clear labor markets, or subsidize sloth through increased payments and subsidies to individuals, discourage bankruptcies to free up capital, or in the case of the last recession, actually purchase debt from investors.
The result of all of this intervention is that the economy is loaded down with bad debt and so-called “mal-investments,” that have prevented any real economic growth. In fact, as we have written in the past (https://guerrillaeconomics.com/2017/03/monthly-manifesto-february-2017/), the entire statistical growth in GDP since the past recession is due to increasing government borrowing rather than to actual productive activities.
So maybe we have not been wrong after all, and maybe we are in a recession. One thing is certain, through both Republican and Democratic administrations, We’re going nowhere. We’re going nowhere.