The Stagnant U.S. Economy: A Graphical Complement to Higgs’s Contributions
By Angel Martin • Friday September 23, 2011 11:02 AM PST •
Financial markets and analysts fear a new global recession. Data point to a growth slow-down that might eventually lead to a fall in production.
Some pundits, who bought the idea of a recovery in previous years, seem to be surprised by the negative data of the latest months. The stock market probably shared this earlier excessive optimism with them.
However, a careful analysis of what has happened since the onset of the Great Recession would have hardly shown a solid, sustained recovery. On the one hand, fiscal and monetary stimulus might have had a positive impact on the GDP figures, creating confusion over the economy’s real situation. On the other hand, the labor market is still in horrible shape, with the official unemployment rate stuck in the neighborhood of 9 percent. However, the “unprecedented rise in the number of persons with very long durations of unemployment during the recent labor market downturn” (in the words of the Bureau of Labor Statistics) is even more disturbing.
Therefore, given that there has been no real recovery, it is nonsense to speak of a new recession. Rather, the present crisis manifests the failures of the economic policies implemented so far.
The question that analysts have to ponder, then, is why the slump goes on (see my article at The Freeman “And the Slump Goes On”, in which I discuss several answers to this question in more detail).
Many people think that the U.S. economy’s key problem is that households barely spend; because they fear for the future and unemployment is high, they save or hoard their money. This consumer behavior, it is argued, brings about a (Keynesian) vicious circle: if consumption is low, companies won’t produce output or hire workers because they won’t be able to find a buyer.
Assuming for the sake of the argument that the Keynesian theory applies to reality, let us look at the data. As Robert Higgs showed, real personal consumption expenditures have recovered from pre-recession levels. This recovery can be clearly seen in this graph, which shows quarterly data from the first quarter of 2006 to the second quarter of 2011.
Furthermore, government spending also currently runs at higher levels than in 2007. We can see the comparison between the evolution of gross private investment and gross government investment since 2006, which illustrates perfectly the difference between the private and the government sector’s performance in recent years.
Therefore, as Dr. Higgs suggested, the major impediment of the recovery is not private consumption or government spending, but the lack of dynamism of private investment. However, it is more rigorous to take into account not the gross, but the net private investment—the crucial macroeconomic variable that underlies economic growth by increasing the economy’s productive private capital stock.
The next graph shows the evolution of this variable in recent years. We can see that after the drop in 2009, the current level of net private domestic business investment remains far away from the pre-recession level.
Robert Higgs and some mainstream economists, such as Allan Meltzer, Thomas F. Siems (Senior Economist and Policy Advisor at the Federal Reserve Bank of Dallas), and Alberto Alesina, have argued that the great uncertainty with regard to future government policies—e.g., regulations and taxes—is discouraging investors and entrepreneurs from risk-taking, innovating, hiring workers, and investing.
Moreover, it is plausible to think that such uncertainty affects relatively more the small and medium enterprises and potential new entrepreneurs, which have little financial leeway. This situation is particularly damaging to the U.S. economy given that, as a report of the Kauffman Foundation suggests, start-up companies account for the bulk of employment growth.
Although it is almost impossible to gauge the quantitative impact of this institutional uncertainty, logic and different kinds of evidence undoubtedly suggest that it matters, and it may matter a great deal.