What’s Holding Back the Recovery?
By Robert Higgs • Monday February 21, 2011 11:00 AM PDT • 13 Comments
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.
Tags: Budget and Tax Policy, Economics, Politics, The State 
Dr. Higgs,
Has the trade deficit increased since the recession began? How about consumer debt compared to savings? Do these factors play a key role in determining when there will be a recovery or not? My impression is that the trade deficit is causing inflation in China and India, and soon that inflation could come over here and decrease the trade deficit.
Ken Camp | Feb 21, 2011 | Reply
Our Congress—Democrats, Independents and Republicans—are incapable of mustering the courage necessary to reduce the borrowing-spending-money printing and regulation that is destroying our economy. With very few truly dimwitted exceptions, each of our Senators and Representatives knows what is required. They also hear the clamor from the public for an end to the borrowing-spending-money printing and regulation. They heard last summer as voters made it clear. Even Democrats got it. And on cue, the Republican politicians sang hosanna it is true, it is true, we have always said so. Before the election they spoke of returning the total budget to 2008 levels an amount $500B less than today’s proposed budget. And now that the Republicans control the House and the budget process they are willing to let the chips fall where they may. No more excuses. Just consider the recent proposal by the courageous House Republican budget hawks—a $60B reduction in the planned $1.5T budget deficit.
OK, so the House leadership doesn’t get it but the hard core fiscal conservatives in the Republican party got it. They do admit it probably isn’t possible politically .
Our Washington aristocracy—the professional politicians and those who own them—will see the nation go down in flames and riots in the streets before they will have the courage to cut the defense budget and entitlements and corporate subsidies sufficiently to put the nation on a sustainable economic path. Congress will continue rewarding the politically powerful banks, corporations, government unions, the federal and state bureaucracies and the teachers unions who fund their reelections . . . until the imminent death of the nation leaves them no alternative.
Until then, until we enter a screaming economic nosedive, they will continue to pay lip service to the voters and otherwise reward those who own them. And the economic collapse will happen because it must. The debt the federal government owes plus the implicit debt to those on entitlements is such that it cannot be serviced with sound dollars. For that reason the buyers of our federal debt are beginning to demand higher and higher rates on the long-term bonds the Treasury auctions weekly.
It is impossible to predict when, nor what combination of actions will precipitate it, but we can predict an escalating rise in bond rates and a fall in bond values as buyers here and abroad become less and less willing to hold long-term treasuries. Perhaps we are not witnessing its beginnings, but the value of the Ishares ETF collection of 20-30 year treasuries has steadily decreased in value over the last 6 months while the interest rate yield demanded by buyers has risen a corresponding amount (about 17%). The change has been steady. I see no evidence of a quickening rate change. Nonetheless, the Fed, with its quantitative easing program, has been purchasing long term bonds over that period with the express purpose of keeping long-term interest rates down.
Well, it’s not working.
Another goal of the Fed was to create a rise in asset prices—specifically stock prices, which has worked. Wall Street is certainly happy as are the banks and corporations who oversee Washington. But it has been done with a Fed funds rate that allows banks to borrow at .25% per year and use the borrowed money to buy bonds currently paying 4.7%. This is not a free market. It is nothing like a free market. And these policies too, are creating a bubble.
Like the fall in bond values, the rise in commodity prices is also troubling. DBA an ETF tracking agricultural commodities is up 36% in six months and is climbing steadily at that rate. The purchase of commodities is a hedge by those of us who anticipate the further destruction of the dollar as means of funding the federal programs on which the banks, corporations, bureaucracies and unions are dependent.
The Fed is doing all it can to keep the bloated Washington beast feeding comfortably. That is its job. As the money is spent by Congress, the Fed and Treasury must somehow produce the dollars. The effect on our nation and others will become intolerable . . . even to Washington, because if allowed to continue it will result in the death of the host on which that beast feeds.
We are quickly coming to the point where our government won’t be able to borrow because buyers of bonds will demand interest yields that cannot be paid with sound money. We won’t be able to pay the interest on the debt and continue feeding the beast. At that point there is no alternative to at least a partial but substantial default on all bonds and entitlements. Inflating our way out with a printing press will destroy the government as surely as it did for the German Weimar Republic in 1923. It may be a default, but it will be better than hyperinflation.
Bernanke and the political appointees on the Federal Reserve Board of Governors tell us not to worry, it’s all under control. But he and the Fed are the same people who raised the funds target rate from 2% in 2004 to 5.25% in July of 2006. Raising the interest rates on millions of adjustable rate loans set off the housing collapse that is still underway.
Bernanke and the Fed Board of Governors are certain they are now in control but they failed to see this current disaster until it was too late. (Many libertarian economists and sophisticated investors did see it coming.) Greenspan believed he was in complete control when he raised rates to 6.5% in 2000 causing a vicious recession and the stock market collapse from which we never recovered before Bernanke set us into a worse recession and another stock market collapse. Did you know that substantially all recessions in the 20th century have been preceded by a rise in Fed funds rates? Just how smart are those guys? But they are certain.
I am also certain, certain that hubris is a disease that is epidemic in Washington.
Liberty is the right to chose. A free market is the sum of all the free choices made by all the free people who make it up. Our market is not free because the Washington Aristocracy who has stolen our government has also stolen our marketplace and our freedom to make our own choices.
erne lewis | Feb 21, 2011 | Reply
To repeat my question: What’s holding back the recovery? My answer: the failure of private investment to recover fully.
Specious. STRUCTURES, STRUCTURES, STRUCTURES! Disaggregation of private investment is instructive, Bob. For instance, Steve Wynn is not gonna invest in another hotel/gaming structure in Las Vegas when his existing structures have below trend occupancy rates and gaming receipts.
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
You are aware, Bob, that in every year of the Reagan, Bush41 administrations (1981-1993) federal government consumption expenditures and gross investment exceeded 20% of GDP, the same situation in 2010. You may have a case when it comes to cyclically adjusted transfer payments, but in my opinion it is just “baby-boomer” social security and medicare demographics. Put the emphasis on medicare.
marmico | Feb 22, 2011 | Reply
There are a lot of questions here about how the Taxper bailout funds have been used , which directly effect the recovery ....
http://dailybail.com/home/the-hammer-gets-hit-by-a-tree.html
http://dailybail.com/home/there-are-no-words-to-describe-the-following-part-ii.html
tony N | Feb 22, 2011 | Reply
Watch the first video to see the way they roll over and over the capital to create the leverage on the currency to keep the demand of its use in circulation , but as far as the economic remedy in the Credits go I say these are communist rooted remedies and the USA people need to start New on their own under the Constitution , so Kick the Federal Reserve and those that are in the USA extracting our Resources out NOW and we the people can make our way ;
http://www.youtube.com/watch?v=TMkXA6kqNsw&feature=player_embedded, and then ask is the level of Ignorance, or Arrogance, in these next 2 videos, reason to Audit the Federal Reserves management of the Dollars Use as Reserve Currency, and , continue below please ...
http://www.youtube.com/watch?v=ol3mEe8TH7w&feature=related
http://www.youtube.com/watch?v=-RAugiQsTR0&feature=related
( but remember we are seeing a Peaking of willingness by the multinational BRIC nations to continue to accept the dollar, so the time has come to mop it up so to speak because these BRIC nations have ended up using the Federal Reserves Ponzi scheme to consolidate all the worlds intrinsic value in raw materials, the BRIC are even inside the USA extracting our Raw material Resources the giver of our FREEDOM to stay Independent hello, whose running the country ??
And now add these next links together with what you just researched above to expand the way they engineered the financial Ponzi scheme;
And while the Foreigners mine our Vital Life giving resources away our Government lets our own Private Enterprises go Broke??
And at the same time Our Domestic Enterprises that create our communities Jobs and wealth circulation in our nation being undermined like THIS ??? What in God’s name is Going on here???
http://www.usatoday.com/money/companies/2011-02-12-seahawk-drilling_N.htm
http://www.americanthinker.com/blog/2011/02/obamas_drilling_moratorium_cau.html
The Federal Reserve and Central bankers roll over and over the Money they trade with each other and those multinationals that create something out of raw material resources, and these vital resources which has now been consolidated by the BRIC nations is calling for the Federal Reserve to Replace the dollar with a Currency of their choice, so the question is not that the Federal Reserve has ran this Ponzi scheme out to the point of USA economic collapse, are they going to walk away from the USA people leaving us to go broke, and loose our Resource base of Life giving Liberty and FREEDOM, all because they Used the USA Resource base as a leveraged asset to run this Debt up to this Point, and go be the BRIC nations new Financial printing Press of the 21st Century .
We better be controlling our Own vital resource supply if we choose to Be Independently FREE, and we are not doing that as you see these links are showing ,
http://www.google.com/hostednews/ukpress/article/ALeqM5h3tMGThD1bVMfWa0kXDU5qK3g_wQ?docId=N0451471296454650220A
Chinese national company is interested in Boise ......
http://www.idahostatesman.com/2010/10/11/1374846/chinese-politics-spotlight-idahos.html
http://www.idahostatesman.com/2010/12/31/1472023/chinese-company-eyes-boise.html
RUSSIANS TO BUY WYOMING URANIUM MINE ??
http://www.songoftruth.org/forum/topics/russians-to-buy-wyoming
But this Ponzi Scheme the Federal Reserve has been playing with this International Market functioning under the LIE of FREE trade while the ASIAN members of the BRIC manipulated their Currency values to the Point of that fraud creating their advantage to consolidate these raw materials in exchange for their rolling the dollars they exchanged for these raw assets back to the FEDERAL RESERVE and they in turn rolled these bundled up worthless credits into the Derivative markets and grew that to the point of collapse we see as there is Nothing to back these bundles of worthless paper up,
http://www.mi2g.com/cgi/mi2g/frameset.php?pageid=http%3A//www.mi2g.com/cgi/mi2g/press/230310.php
while this process was taking place over the years of FREE trade and we did nothing to balance the value of the dollar by maintaining a tangible asset class in control by the nation that represents the dollar, THE United States of America, doing that with a tariff Trade Policy because we were the Higher valued currency to begin with , and would need to be the enforcing agent of this value , and so we continued to allow the manipulation work to the advantage of the BRIC nations and they now control all the Life giving resources around the world together as a alliance that’s becoming more and more hostile by the Day , and have the USA and the Federal Reserve Dependent upon these BRIC nations to the Point that they are Now willing to use this Leverage Against the USA by calling for an end of the dollar, our Representative of USA Raw material worth and the durable life giving products we the people can create our life giving freedoms with, Do We the People Realize this is what FREEDOM, LIBERTY is created with?? the Drive through window at MC Ds is only as relevant as the Supply that FEEDS what’s In the bag, Hello America is anyone Listening?? But The actions of our Trade Policy and the Federal Reserve have placed The BRIC nations Control our Freedom and Democracy as a FREE Nation in this current World Market system and they are about to use it against the People of the USA by Inflating now what they control by restricting the developments of what they control and shrinking the supply to the point of rationing and we the people will whither away!!!!!
China and Russia call for New World Currency while it Mines and Develops USA Oil Resources, What in GOD’s name is going on here ??? This right here is an admission of Guilt by our Government to Not enforce the Trade rules of FREE floating Currency laws so the USA could Maintain some form of tangible value behind the Dollar either as a Industrial base or a paid duty on imported products, this is a CRIME against the American People and we NEED JUSTICE NOW!!!!!
http://online.wsj.com/article/SB123780272456212885.html
http://news.xinhuanet.com/english/2009-04/01/content_11109506.htm
http://www.telegraph.co.uk/finance/currency/8316834/International-Monetary-Fund-director-Dominique-Strauss-Kahn-calls-for-new-world-currency.html
http://www.wnd.com/?pageId=109774 if Tariffs would have been in place all these years we wouldn’t be in this mess and behind the 8 ball on controlling our Vital Resources the giver of Independence!!!!!
It was all a method of this Trade Policy , that has led to ONLY a consolidation of current world resource supplies without very little expansion in Resource supply and now we are seeing the results of this in Volatility in price stabilization in Commodities, a Pure Instinct of Human Beings Level of Understanding this as a Independent Free Thinking survival Instinct .
The High Cost of the China-WTO Deal: Administration’s own analysis suggests spiraling deficits, job losses; By Robert E. Scott; February 1, 2000:
http://ning.it/cNJn9O
And
http://ning.it/bTIt9f
It has also taken Mexico’s Jobs away over the years too. Europe’s Jobs too. This is all because of a Simple Currency manipulation that does nothing to promote quality in our products.
Remember what Ross Perot said, we would Hear a Giant Sucking Sound with this Trade Policy, he was right. http://www.thenation.com/article/new-giant-sucking-sound
tony N | Feb 22, 2011 | Reply
A mere $500 Billion in “lost” private investment out of 2.1 Trillion (2007 level) is enough to keep the economy from hiring a lot more workers?? Honestly?
Wow... That’s one weak-ass economy we’ve got. Even though it’s still at a high 1.6 trillion...
Brandon | Feb 24, 2011 | Reply
If I didn’t know any better, I’d say big business is just hoarding the cash and not hiring because of “lack of demand.” Don’t they realize that demand would INCREASE if they hired more people and gave them enough money to buy a lot more consumer goods??
Brandon | Feb 24, 2011 | Reply