U.S. economic growth still feeble -- a look at the numbers

As reported here, the U.S. Commerce Department has stated that third-quarter economic growth in the country was higher than expected, but still not that high:

The economy grew slightly faster last summer as Americans spent a little more freely. Yet it remains too weak to reduce high unemployment just as Democrats face deep losses in Tuesday's elections.

The Commerce Department said Friday that the economy expanded at a 2 percent annual rate in the July-September quarter. It marked an improvement from the feeble 1.7 percent growth in the April-June quarter.

Consumers helped boost last quarter's economic growth with 2.6 percent growth in spending. That was better than the second quarter's 2.2 percent growth rate and marked the biggest quarterly increase since a 4.1 percent gain at the end of 2006 before the recession hit.

A great place to go to get a better perspective on this is the website Trading Economics, which allows you to chart all sorts of economic indicators from around the world.

So let's compare GDP growth rates from this recession as compared to the dire recession of the early 1980s. According to Wikipedia's handy list of recessions in the U.S., the "Great Recession" lasted from Dec. 2007 to July 2009 -- a total of 18 months. The second and more drastic of the early 80s recessions lasted from July 1981 to Nov. 1982 -- that would be 16 months, though keep in mind that the economy was coming off of a short recession that occurred in 1980.

So here we are in October (nearly November) 2010 -- a full 15 months after the official end of recession. So let's plot a graph of the U.S. GDP growth rate that takes us back four years to November 2005, to a time when the economy was supposedly growing quite nicely:



Of course we only get data as it comes in by quarter, so the first figure here shows up on January 2006 (which represents the fourth quarter of 2005).

Here we see that GDP spiked to near 6% growth in early 2006.  For much of the rest of the period, it hovered between 1% and 3%, dipping down to 0% in late 2006.  We then see the big dip that occurred during the recession, followed by a short spike in growth at the start of 2010 (i.e. Q4 2009).  As of now, the U.S. is back into a slow growth phase (note that today's 2% rate does not appear on the chart).

Now, let's look at a similar time frame for the early 80s recession.  15 months after the recession ended would take us to February 1984.  Going back five years to February 1979, we get a GDP growth rate chart that look as follows:



Here the situation is much more erratic, due in part to the short 1980 recession I mentioned earlier.  Growth prior to that short recession hovered between 0% and around 3%.  We then get a sudden dip in growth, followed by a huge spike up to around 7-8%.  The second recession hits, but then we get a tremendous rebound -- throughout most of 1983 GDP growth was approaching the 10% mark.

What does this tell us? Well, first off, the current recovery is not going quite as well as previously expected. This is something that we already know. Yet it is worth examining exactly how sluggish our recovery is at the moment. The 1983 rebound saw GDP growth approach double digits.  So far, the post-Great Recession growth rate has not gone beyond 5.7% (see here).  Since then, of course, the recovery has stalled, and GDP growth has dipped down to the 2% range.

But there is something else worth noting here. We tend to talk about the supposed boom years of the mid 00s that preceded the last recession. But was GDP growth all that great? If you look at both graphs, you'll see that growth in 2006 and 2007 sometimes dipped down quite sharply, and that the Q1 2006 figure is the only one that is significantly high.  Growth in the years leading up to the 1980 recession was not terribly different (note that the graphs use different scales, so that the 80s figures look less impressive at first glance).

In fact, let's take a look at growth through the second half of the 1970s. The brutal "stagflation" recession of the mid-70s officially ended in March 1975. So let's plot GDP growth from that point to February 1979:



Again, the situation is rather erratic.  But note how high the GDP growth rate rose in the years following the mid-70s recession.  Q4 1977 stands at 0%.  And there was a dip down to the 2-3% range in the second half of 1976.  Other than that, however, growth was rather significant, ranging from 5-10%, and soaring past the 15% mark in Q2 1978.

What does this tell us? Well, despite our current impressions, growth in the mid-00s was not exactly record-breaking (you can check out the entire decade for yourself if you wish, but the story is generally the same in the years following the 2001 recession). Considering how much of that growth was built on a house of cards that stood atop a crumbling housing market, those figures should be even more sobering. What exactly were we all doing in the 00s? More importantly, where will future growth come from, given that pre-recession economic growth was so unimpressive?

Of course GDP is only one economic indicator. I'm not trying to say that things were "better" in the 70s than they are now -- by most measures that is not true. But this does give us a good idea of the problems that lie ahead in terms of achieving true economic recovery.

American believe in equality, but they don't want equality

The Tea Party movement and its supporters are all about the capitalism. They accuse President Barack Obama of believing in an agenda in which wealth is redistributed in such a way that the U.S. will become some sort of strange neo-Marxist amalgam. They believe he wants to take taxpayer dollars and dole them out to the poor, to his pals on Wall Street, the auto companies (so that they may become federal clients), third-world green energy concerns (via a tax on carbon), and, of course, to a "world government" that they envision as the ultimate endgame of his evil plans. Tea Party people, on the other hand, prefer that the rich stay rich, and that the poor pull themselves up by their bootstraps and take care of themselves.

All of this makes a recent study by scholars at Duke and Harvard Business School, as reported in Businessweek, all the more intriguing. According to the study, Americans believe that wealth is distributed much more evenly along class lines than is the reality. Even more surprising than this, they believe that income distribution should be even more equal to what they perceive. Here is how Businessweek describes it:

It might be surprising to learn that Americans are in broad agreement on the need for a more equal distribution of wealth. Yet that's what a forthcoming study by two psychologists, Dan Ariely of Duke University and Michael I. Norton of Harvard Business School, has concluded. First, Ariely and Norton asked thousands of Americans what they thought the nation's actual wealth distribution looks like: how much is owned by the wealthiest 20 percent of the population, the next-wealthiest 20 percent, and on down. The researchers then asked people what, in an ideal world, they would like the nation's wealth distribution to be.

Ariely and Norton found that Americans think they live in a far more equal country than they in fact do. On average, those surveyed estimated that the wealthiest 20percent of Americans own 59 percent of the nation's wealth; in reality the top quintile owns around 84 percent. The respondents further estimated that the poorest 20 percent own 3.7 percent, when in reality they own 0.1percent.

And when asked to give their ideal distribution, they described, on average, a nation where the wealth distribution looks not like the U.S. but like Sweden, only more so—the wealthiest quintile would control just 32 percent of the wealth, the poorest just over 10 percent. "People dramatically underestimated the extent of wealth inequality in the U.S.," says Ariely. "And they wanted it to be even more equal."

The United States, according to this study, is a nation of people who would like to spread the wealth around. They just don't know it.

Here is a chart borrowed from the Businessweek website that makes this clearer:



So if Americans were more aware of these numbers, would a socialist revolution be in the offing. Here is Businesweek's take on the situation:

It's possible that if more people understood how deeply unequal American society has become they would support measures to combat it. The U.S. now has the world's second-lowest level of income mobility between generations, after England, according to research by economist Miles Corak at the University of Ottawa. Yet studies have also shown that voters have an impressive ability to absorb information that contradicts their beliefs without letting it change their minds. People support the abstract goal of equality, it seems, while staunchly opposing specific government measures—whether increasing tax rates or limiting executive pay—designed to impose it. Getting there, in other words, is what starts the political arguments, even at a moment of widespread bipartisan anger at Wall Street.

This is a rather balanced analysis, but I believe that it fails to truly capture how the average American really feels. Businessweek claims that "people support the abstract goal of equality". But is this really true?

The fact is that the theory of supply-side economics, closely associated with "trickle-down economics", still holds great sway in America. Fox News pundits such as John Stossel are never shy to praise its supposed virtues:

Taxes discourage wealth creation. That hurts everyone, the lower end of the income scale most of all. An economy that, through freedom, encourages the production of wealth raises the living standards of lower-income people as well as everyone else.

A free society is not a zero-sum game in which every gain is offset by someone's loss. As long as government keeps its thumb off the scales, the "makers" who get rich do so by making others better off. When the government allocates capital or creates barriers to competition, however, all bets are off.

Many Americans, at least on the right side of the spectrum, generally see no problem with living in an unequal society. That does not mean that they enjoy the fact that poverty is still rampant. Rather, they believe that the unequal distribution of wealth is necessary to raise the poor to a higher living standard. The rich own much of the wealth, but if they didn't, so the theory goes, then there would be no mechanism by which additional wealth could be created.

Of course, there are many pundits - and a good deal of data - that refute such ideas. But that's a debate for another time. Let's just say for the time being that, despite what Businessweek thinks, many Americans see inequality as a virtue, not a problem.