May 29, 2014
George Will devoted his column today to complaining about Obamanomics, or more specifically the state of the economy during the Obama administration. The article includes a serious of inaccurate or misleading statements which Will presumably made because he doesn’t have access to data from his home or office in Washington.
1) Will told readers:
“June begins the sixth year of the anemic recovery from the 18-month recession. Even if what Obama’s administration calls “historically severe” weather — a.k.a., winter — reduced GDP growth by up to 1.4 percentage points, growth of 1.5 percent would still be grotesque.”
Actually quarterly data are always erratic and an individual quarter tells people almost nothing about the state of the economy. (The first quarter number was revised downward this morning to show negative growth.) If Will thinks that a 1.5 percent growth rate would be “grotesque” then he would presumably also be appalled by the 1.9 percent growth rate the economy saw in the second quarter of 1986, the sixth year of the Reagan presidency. The best quarterly growth figure we have seen in the last four decades was the 16.5 percent annual growth rate in the second quarter of 1978 in the midst of “Carter-era stagflation.”
2) Will complained:
“The recovery’s two best growth years (2.5 percent in 2010 and 2.8 percent in 2012) are satisfactory only when compared with 2011 and 2013 (1.8 percent and 1.9 percent, respectively).”
The recovery has indeed been anemic, but this is due to the fact that this recession was qualitatively different from prior recessions, with the exception of the 2001 downturn. It was caused by the collapse of a housing bubble. If Will had access to data he would know that house prices rose by more than 70 percent above their trend level at the peak of the bubble in 2006. This led to record levels of construction. The wealth effect from $8 trillion in bubble generated equity led to a consumption boom with the savings rate falling to record lows.
When the bubble burst there was no easy way to replace the lost demand from the collapse in residential construction and consumption. Folks who have managed to take an intro econ class know that there are only five components of aggregate demand. In addition to residential construction and consumption, we have non-residential investment, government spending, and net exports. An economic collapse will not generally provide the basis for a boom in non-residential investment. Will’s Republican allies in Congress (along with many Democrats) have acted to make sure there was no big increase in government spending.
This only leaves net exports. A major rise in net exports would require a sharp decline in the dollar, which would make U.S. goods and services more competitive in the world economy. However powerful interests like Walmart, which have low-cost supply chains in the developing world, have no interest in seeing the dollar fall in value relative to other currencies, which would undermine their competitive advantage.
Anyhow, given the nature of the downturn, the weakness of the recovery was predictable and predicted. The economy was also slow to recover from 2001 recession, which was caused by the collapse of the stock bubble. It did not start generating jobs again until the fall of 2003 being pulled forward by the growth of the housing bubble.
3) Will refers to the Carter era “stagflation.” The economy’s growth rate for the 16 quarters of the Carter presidency averaged 3.2 percent. This is not an especially bad growth rate, especially since Carter had to deal with the quadrupling of oil prices associated with the Iranian revolution in the last two years of his presidency.
4) Will touts the virtues of Paul Volcker’s recession at the start of the Reagan presidency which he tells were followed by:
“the 1983-88 expansion, when growth averaged 4.6 percent, including five quarters above 7 percent.”
The main reason the growth was so strong during this recovery was the severity of the recession in which unemployment peaked at 10.8 percent. The recession was a classic post-war recession brought on by high interests. While the downturn was painful, the prescription for recovery was simple: lower interest rates. With a huge amount of pent-up demand for housing, the lower interest rates sent construction soaring. Residential construction increased at a 35.7 percent annual rate in the fourth quarter of 1982, an 88.6 percent rate in the first quarter of 1983, and a 55.4 percent rate in the second quarter of 1983. This sort of construction boom was not possible coming out of the 2007-2009 recession since the downturn was caused by the collapse of the building boom sparked by the bubble. The 1983-88 expansion was also helped by the collapse of oil prices as more oil came on line in response to the 1978-80 surge in prices and consumers responded by reducing demand.
5) Will claims:
“The more than $1.1 trillion of student loan debt — the fastest-growing debt category, larger than credit card or auto loan debt — is restraining consumption, as is the retirement of baby boomers.”
Actually consumption is not restrained. The saving rate out of disposable income was just 4.0 percent in the last quarter. This is lower than at any point except at the peaks of the stock and housing bubbles when the wealth effect from trillions of dollars of bubble generated wealth was driving consumption.
6) Will tells readers:
“And investment in residential property is at the lowest level (as a share of the economy) since World War II. ‘If,’ Irwin [New York Times reporter Neil Irwin writes, ‘building activity returned merely to its postwar average proportion of the economy, growth would jump this year to a booming, 1990s-like level of 4 percent.'”
This was true in 2009-2010 when residential construction was less than 2.7 percent of GDP. In the most recent quarter construction was at 3.1 percent of GDP. It would of course be helpful if construction rose to 4.0 percent of GDP, but it is not surprising that housing construction would be below trend with vacancy rates still at unusually high levels as a result of the overbuilding of the bubble years.
Clearly if Will had access to these data he would have written a very different column. Fortunately for Will, at the Washington Post people who write on economic issues are not expected to be familiar with economic data.
Note: Typos corrected.
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