2008, Obama, Trump and 2% Growth

by Ray Keating

The Keating Files – March 11, 2020

Amidst banter over the economy on Fox Business News early this week, reporter Susan Li asked, “What’s wrong with two percent growth?” Well, actually, a heck of a lot.

Now, I’m not picking on Ms. Li, in particular, as many of her colleagues in the financial news business think that two percent real economic growth is just dandy. Indeed, in the political world, it apparently depends on who happens to be sitting in the Oval Office as to whether or not two percent growth is good or bad. For example, Republicans criticized a recovery/expansion period under President Obama in which economic growth averaged 2.2 percent, but Democrats argued it was just great. And now, with the Trump presidency, real growth averaging 2.5 percent is a downright great economy, according to Trump and the GOP.

To put this all in perspective, since 1950, real GDP growth has averaged 3.3 percent, and during economic recovery/expansion periods (that is, factoring out recessions), growth averaged 4.4 percent. So, 2 percent, 2.3 percent or 2.5 percent doesn’t cut it.

Some actually ask: What real difference does this make? 

Well, consider the “Rule of 70.” What is that? Divide 70 by the average annual real rate of growth, and one arrives at the number of years it takes for GDP, income or living standards to double. At 5% annual growth, it takes 14 years for real living standards to double, while at 1%, it would take 70 years. At 2 percent, it takes 35 years for living standards to double, while at 3.3 percent, it’s 21 years. These differences matter, having substantive effects on human beings. 

Last month, Barack Obama tweeted about his signing of the American Recovery and Reinvestment Act 11 years earlier, claiming that it paved “the way for more than a decade of economic growth and the longest streak of job creation in American history.” Naturally, President Trump had to respond, “Did you hear the latest con job? President Obama is now trying to take credit for the Economic Boom taking place under the Trump Administration. He had the WEAKEST recovery since the Great Depression, despite Zero Fed Rate & MASSIVE quantitative easing. NOW, best jobs numbers ever.”

And on it goes. Quite frankly, neither of these guys should be all that excited about the economy of the past 11-plus years in which they resided in the White House. 

The December 2007 to mid-2009 recession still matters, in a certain sense. Again, in terms of the key economic number, real GDP growth from 1950 to 2007 averaged 3.6 percent. From 2008 to the end of 2019, growth averaged a mere 1.7 percent, that is, less than half of where we should be.

To further drive home the problem, let’s focus on the full years during this current economic recovery/expansion period, that is, from 2010 to 2019. If the U.S. economy had grown at an average rate of 4 percent (not even at the 4.4 percent historical norm), then the 2019 economy (measured by real GDP) would have been $3.5 trillion larger in 2012 dollars than it actually was. That’s $3.5 trillion in real lost output!

Indeed, 2008 matters. The credit meltdown and falling into what often is referred to as the Great Recession left a deep mark. Some lost faith in free enterprise. Others came to fear trade and immigration. Still others came to see government as some kind of savior. In reality, the lesson from the 2008 economic mess and its aftermath should be the gross failure of government. 

For example, an aggressive “affordable housing” regulatory and spending agenda incentivized bad loans and laid the foundation for the housing/mortgage mess. Government bailouts, stimulus efforts and loose money failed to revive strong economic growth. We should have snapped back from that deep recession, but we didn’t. Increased taxes and regulations made matters worse, and played key roles in a poor recovery. And the U.S., under Obama, moved to the global sidelines in terms of international trade, and then, under Trump, moved aggressively in a protectionist direction. That hasn’t worked out, with U.S. businesses facing increased costs, fewer opportunities and reduced incentives for investment, and trade paring back economic growth, rather than feeding it as had been the case for most of the post-World War II period.

The tax and regulatory relief achieved so far under the Trump administration has been a plus, but it has not been enough given what happened under Obama, and given Trump’s own costly trade, government spending and, in certain areas, regulatory (like antitrust) policies.

No, two percent growth is not positive, and it should not be considered the norm for the U.S. economy. A pro-growth agenda of substantive and permanent tax and regulatory relief, advancing free trade, reining in government spending and monetary policy focused on price stability would get the U.S. back on a robust path of economic growth, which would make a real difference for every American.

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Ray Keating is a columnist, an economist, a novelist (his latest novels are The Traitor: A Pastor Stephen Grant Novel, which is the 12^thbook in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction), a nonfiction author (among his recent works is Free Trade Rocks! 10 Points on International Trade Everyone Should Know), a podcaster, and an entrepreneur. You can also order his forthcoming book Behind Enemy Lines: Conservative Communiques from Left-Wing New York – signed books or for the Kindle. The views expressed here are his own.