Exit Blocked, No Way Out

Long term trends, noise removed or reduced, can be very helpful in understanding what is really going on in our national economy.  In the last post I discussed the link between private investment and GDP but wanted to elaborate a bit on the long term GDP trend and the difficulty we face in reversing that trend.

The chart below is all computed from government data published on the BEA NIPA website.  I started with GDP in current dollars and used the GDP deflator to convert those numbers to constant 2005 dollars.  Then I divided the annual numbers by population, which is up about 75% since 1960, to get annual GDP per capita in 2005 dollars.  Then I calculated the percent change for each year from the previous year and, beginning in 1965, calculated the five year moving average of that percent change.  So, with much of the year-to-year noise removed, each point in the graph represents an estimate of the average real growth in GDP per capita for the current and previous four years.  It may still look noisy, but the important long trends have begun to emerge visually.  Click on it to read the fine print.

In a nutshell, here is an amateur economist’s take on the economic history of the USA since 1950.  Prosperity reigned in the postwar years, driven by positive can-do attitude and energy of the citizens after the WWII suffering and victory and freeing of resources that had been consumed by the war effort.  That came to an end with the excessive “guns and butter” spending required by President Johnson’s Vietnam and poverty wars and darkening of the national attitude.  

Nixon tried to put a damper on resulting inflation with counter-productive price controls.  

The second major blow was the first big oil crisis in 1974 followed by rapidly increasing energy prices, stagflation, the Iranian hostage crisis, and President Carters donning of a sweater to keep warm while speaking to the citizens on TV.  Reagan’s tax cuts and positive mental attitude and optimism turned things around in the 1980’s but federal spending continued out of control, and the Reagan revolution was largely undone in an ill-advised attempt to get the deficit under control with tax increases rather than with spending cuts.  False signs of life appeared in the late 1990’s as the Dot Com bubble pushed technology stock prices to absurd levels before the pop in early 2000.  

The Bush administration, failing to recognize that the current government surpluses were not going to continue indefinitely, whacked tax rates, launched two wars on credit, and even joined the liberals with an unfunded Medicare drug plan.  Once again false signs of life appeared in the form of a government induced real estate bubble which popped in 2007-2008.  Since then we have been in a kind of organ donation program, trying to spread the residual wealth around instead of focusing on getting the economy humming again.

The exit from our current malaise, as described in the previous post, will not be found in Washington DC except to the extent that our leaders there recognize that serious private-investment-invigorating tax reform, resulting in GDP growth, corporate and personal earnings growth, and tax revenue growth, is the only way out.  Until they garner the courage to deal with that issue in a non-partisan manner, the exit remains blocked with no way out.

Well, there is that emergency exit, accelerated inflation, where many will be crushed and killed, economically, as they try to escape, and which will lead only to the end of the USA as a free world power.

By the way, the major highly visible and disturbing symptom leading to this kind of diagnostic investigation is national debt as a percent of GDP, sort of like blood pressure or cholesterol levels for personal health.  Here is the long term trend, over the same time frame as in the chart above, for that key variable.  Some inverse proportionality seems to be evident.

There is a nice opinion piece by Business Roundtable President John Engler in today's WSJ on how to change the corporate tax structure to force this exit open a bit: Corporate Taxes, The Myths and Facts

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