Here’s Why Washington Still Needs to Worry About the Economy
Friday saw the release of the Department of Commerce’s third and final revision of real gross domestic product for the second quarter of 2014 covering April, May, and June. United States economic output grew at annual rate of 4.6 percent, a sharp reversal of the 2.1 percent contraction recorded in the first three months of the year. In the second quarter, the U.S. economy expanded at the fastest rate in nearly three years. The Commerce Department’s Bureau of Economic Analysis noted that “the general picture of economic growth remains the same,” despite the two-percentage point increase from an earlier estimate.
But still, the quarter’s strength should not be discounted. As Markit Chief Economist Chris Williamson wrote in an email to reporters, “The impressive gain in the second quarter looks to be far more than just a weather-related upturn, with evidence pointing to an underlying buoyant pace of economic expansion,” meaning that the second quarter’s rebound was more than just a recovery from the damage done by the exceptionally cold winter that kept hiring low and put construction on hold. Further, recent economic data indicates that “strong growth has persisted throughout the third quarter,” he added.
But What Does This Growth Really Mean?
Largely, this revision reflected greater growth in exports, business inventory investments, both in residential and nonresidential fixed investment, personal consumption expenditures, and spending by local and state governments. Stripping aside official jargon, the United States economy grew healthier in the second quarter because global demand for U.S. products grew. Since 2009, export growth has helped pull the U.S. economy out of the the Great Recession, a trend that has prompted the creation of millions of high-paying jobs.
To be clear, imports are not necessarily detrimental to economic growth; calculations only tabulate imports as negative values because GDP is a measure of all the goods and services produced in the United States. In addition, businesses spent more on restocking shelves in anticipation for greater consumer demand; and consumers themselves spent more. Household expenditures account for approximately 70 percent of GDP. Companies also felt confident enough in the economy to reinvest in business through new equipment and other necessary infrastructure, while the construction and real estate industries saw gains as well, with spending residential investments increasing.
However, the strokes painted by GDP data are broad, and say little about who benefits from this greater economic prosperity. GDP numbers hide the bifurcated nature of economic growth in the United States. Strong headline growth numbers give politicians the opportunity to laud the strengthening of the economic recovery, while little thought is given to what that growth actually means.
GDP is only one gauge of growth and prosperity, but it is the main tool used to measure U.S. economic health. Since the recession ended nearly five years ago, GDP very rarely achieved what economists call ideal growth. Looking back to the first quarter of 2009, when GDP decreased 6.4 percent, recent data shows the extent to which the economy has rebounded, even if the recovery has both failed to gain consistent momentum and remained slowed by historical standards. On average, the United States economy has grown at an annual rate of 3.3 percent since 1929. Generally, economists say a healthy rate of growth for GDP is between 2 percent and 4 percent. GDP growth fell well above that range last quarter, but the average for the first half of the year, a 1.25 percent expansion, is well under the lower boundary.
Not only has growth failed to gain any significant upward momentum, but “depending on which numbers you emphasize, the economy is either going gangbusters, simply chugging along in its groove, or has hit a rut,” as Brookings Institution fellow Justin Wolfers noted in a recent opinion column for The New York Times. The disparities in assessments of GDP are the result of the uneven nature of economic growth; GDP tends to be volatile on a quarterly basis.
Corporate Profits Stand Near All Time High
Second quarter GDP data makes clear that Wolfer’s assessment is correct. Corporate profits remain near an 85-year high; as a share of second quarter GDP, corporate profits after taxes accounted for 10.6 percent, well above the 10 percent recorded for all of 2013 and the 9.7 percent recorded in 2012, which was a record high. Before 2010, the greatest share of GDP generated by after-tax corporate profits was 1929’s 9.1 percent. While last quarter’s 10.6 percent share may seem to be a small sliver, when compared to the nearly 70 percent generated by personal consumption expenditures, corporate profits have never been higher. Strengthening returns can partly be attributed to the fact that the effective corporate tax rate stood below 20 percent in each of the last three years, well below the nearly 55 percent rate set during the second World War, and the amount spent on wages and salaries have shrunk.
Last year, wages and salaries accounted for 7.1 trillion, or 42.5 percent of Gross National Income, a share lower than in any year previously measured. Comparing data from 2013 and 2006, the last full year before the Great Recession hit creates a clearer picture; between those years, when adjusted for inflation, after-tax profits increased by 36 percent. Those years also saw millions of Americans loose their jobs during the recession. Even though the subsequent recovery has seen all the jobs lost returned, the new jobs created were not necessarily of the same caliber as the ones lost. The recovery created more lower wage jobs. Of course, this change is not all that surprising. Executive pay has skyrocketed over the last few decades as the real wages for most Americans have stagnated. Middle-class jobs are being automated or outsourced, leaving the economy dependent on high skilled workers, like computer programmers, while less skilled workers are pushed into low-paying service jobs.
GDP volatility should not hide the strong trends of rising corporate profits or the falling trend of the country’s medium income. Quality jobs are lacking; wages and salaries are stagnating. Since 1979, wage growth has not kept up with productivity growth, meaning wages have remained flat or dropped for regular workers while the gains for corporate coffers, shareholders, and others dominating the business world have continued. Since this imbalance resulted from the failure of the federal government to create policies ensuring broad prosperity, living standards for workers will not necessarily improve now that economic growth has seemingly strengthened. For example, research from the Economic Policy Institute shows that from the first half of 2013 to the first half of 2014, hourly wages, adjusted for inflation, fell for nearly every worker. The only exception to that are the workers at the bottom 10 percent of the income spectrum whose wages increased when 13 states lifted minimum wage.
A number of economists have noted how remarkable it is that over the last 50 years, economic expansions have relied less and less on building up the incomes of average Americans. Research conducted by economists Emmanuel Saez of the University of California at Berkeley and Thomas Piketty of the Paris School of Economics demonstrates that the gap between the richest 1 percent and remaining 99 percent is the widest since the 1920s.
Some economists see poor government policy as the main problem. “Reorienting fiscal policy: A bottom-up approach,” a paper published in September in the Journal of Post-Keynesian Economics by Bard College economist Pavlina R. Tcherneva, argued that the fact that the top 1 percent took home 95 percent of all income gains in the first three years of the current expansion suggests the means the government has taken to stabilize the economy have failed. In fact, incomes actually fell for the bottom 90 percent of earners, while they rose for the top 10 percent, meaning the top 10 percent saw incomes rise 116 percent.
Generally, in the post-war years, economists have agreed that to stabilize the economy and fight economic slumps, the central bank must cut interest rates. Meanwhile, fiscal policy should be limited to taxation and spending that boosts economic growth overall. But according to Tcherneva’s thesis, that approach does not ensure wage gains reach all income earners because it is untargeted. “Conventional fiscal fine-tuning measures ensure that when government increases its total demand for goods and services, it first improves the conditions of the skilled, employable, highly educated, and relatively highly-paid wage and salary workers,” she wrote. “It is hoped that after those workers increase their own demand for products and services, the fiscal stimulus would trickle down to the less skilled and low-wage workers.”
But “this trickle-down mechanism never quite trickles down far enough to create job opportunities for all individuals willing and able to work.” Instead, Tcherneva believes that fiscal stimulus should focus more on employing workers, especially those at the lower end of the income spectrum. “The manpower of the poor and the unemployed can be mobilized for the public purpose irrespective of their skill level, which in turn will be upgraded by the very work experience and educational programs that the program would offer,” she concluded.
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