What’s Holding Back the Recovery?
To answer the question I’ve posed, consider the following table from the National Income and Product Accounts, accessed yesterday at the Bureau of Economic Analysis website.
Table 1.1.6. Real Gross Domestic Product, Chained Dollars
[Billions of chained (2005) dollars]
According to the National Bureau of Economic Research, the recession began in December 2007, so we can take 2007 as the last pre-recession year for purposes of annual comparison.
Between 2007 and 2010, real GDP fell slightly (2.6 percent) in 2009, then recovered fully in 2010, reaching a new high (but only slightly above the figure for 2007, too small an increase to take seriously).
Examining the major components of GDP, we find that personal consumption expenditures fell in 2008 and 2009, reaching a level 1.5 percent lower in the latter year. Consumption then increased in 2010, more than recovering its loss during the previous two years. In 2010, it stood three-tenths of 1 percent higher than in 2007–again, probably too small a gain to consider a significant difference, in view of the likely measurement error.
So, according to the official data, the recession has come and gone in so far as it has left its mark on real GDP and real consumption spending.
Gross private domestic investment reached a peak in 2007, then fell during each of the following years, reaching a level 30 percent lower in 2009. Although it increased by 17 percent in 2010, it remained 18 percent below its 2007 peak.
Chronically negative net exports actually took a substantially smaller chunk of the real GDP in 2010 than they had in 2007.
Finally, real government expenditures rose relentlessly, before, during, and after the contraction. In 2010, they stood 5.6 percent higher than in 2007. Remember, we are examining real (i.e., inflation adjusted) figures here. Obviously, government made no contribution to falling GDP during the contraction, a fact in which all Keynesians take great pride. However, because government spending increased while other components of GDP (except net exports) either fell or held their own, the government’s share of GDP rose between 2007 and 2010, from 19.2 percent in 2007 to 20.5 percent in 2010 (these percentages I’ve calculated from a different table because chained price-level adjustments, which underlie Table 1.1.6, make such intertemporal comparisons of proportions inaccurate). That government has increased its share of GDP may be good news for Keynesians, but it’s bad news for the long-run performance of the economy.
The most important lessons to draw from the preceding information are (1) that the recession has been associated with a sharp drop in private investment expenditure, and the recovery to date, though already complete in regard to private consumption and total GDP, remains far from complete for investment spending; and (2) government spending has forged ahead, in good weather and bad, thereby increasing its share of total GDP.
To repeat my question: What’s holding back the recovery? My answer: the failure of private investment to recover fully. Let us hear no more about the allegedly pressing need for the government to stimulate consumer spending. Moreover, let us insist that the relentless growth of government spending–not only the kind represented in the National Income and Product Accounts, but also the massive transfer payments–must be stopped. For the government to continue insisting that it must stimulate the economy in the short run, however harmful such government spending might be in the long run, is a recipe for ruin.