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PeakTrader:

I wonder how much the uncertainty of Obamacare (signed into law in March 2010) contributed to slower economic growth before it took effect.

U.S. Real GDP Growth

2010: 2.5%
2011: 1.8%
2012: 2.8%
2013: 1.7% (projected for full year)
2014: 2.5% (projected)

It has been, and continues to be, a very weak recovery from the severe recession. Consequently, the U.S. economy is underproducing by $1 trillion a year.

The U.S. had a massive tax increase in 2013 – almost $500 billion. The federal budget deficit shrunk from $1.089 trillion in fiscal year 2012 to $680 billion in fiscal year 2013 (ending Sep 30th), or around $400 billion.

• The expiration of the so-called “Bush tax cuts” enacted in 2001 and 2003 and extended to December 31, 2012 will draw $165 billion out of the economy.

• The renewal of the regular payroll tax, back to 6.2% from the temporary 4.2% extended to December, will draw another $125 billion out of the economy.

• The expiration of the Alternative Minimum Tax (AMT) “patch” designed to protect middle-class taxpayers from this “wealthy-only” tax will now apply to them as well and will extract another $119 billion.

• The expiration of numerous other tax cuts, tax cut extenders, the reimposition of the “death tax” and the elimination of 100% “expensing” for business investment will withdraw an additional $51 billion, and

• The imposition of five of the thirteen new taxes imposed by Obamacare effective January 1, 2013 will be responsible for the balance.

Grand total: $494 billion, or almost four percent of the country’s gross domestic product to be extracted and transferred to the federal government.

http://www.thenewamerican.com/usnews/health-care/item/12565-more-obamacare-taxes-taxpayers-don%E2%80%99t-know-about

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Updated chart of per capita real GDP output gap:

http://www.advisorperspectives.com/dshort/charts/indicators/GDP-per-capita-overview.html?Real-GDP-per-capita-since-1960-log.gif

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Americans are working harder for the same barrel of oil, the U.S. is consuming about $300 billion less than producing each year in the global economy than before the recession, and per capita real income is over $5,000 a year lower than it should be.

Without the U.S. shale oil boom and shrinking U.S. trade deficits (which add to GDP), this very weak “recovery” would look even weaker.

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There’s been a greater decline in U.S. living standards, since 2007, than per capita real income shows.

Americans are driving less, because gasoline prices are high. I suspect, they’re driving smaller cars too.

American houses are certainly getting smaller:

“The nation’s average home size, which peaked just above 2,500 square feet in 2007, is expected to shrink to 2,152 square feet by 2015.”

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Driving Chart:

http://www.advisorperspectives.com/dshort/charts/indicators/miles-driven.html?miles-driven-POPTHM-adjusted.gif

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Of course, the U.S. had a huge economic boom from 1982 to 2007 – the long boom – since there were only two recessions (and one of them, in 2001, was so mild per capita real GDP didn’t fall that year).

It was one of the greatest eras of U.S. prosperity (particularly compared to the long-wave bust from 1973 to 1982).

However, I've explained before how long periods of idle resources are completely unnecessary.

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Since the Bush recession ended in June 2009, we’ve been in a rolling depression, where the economy improves for a few months and deteriorates for a few months, etc..

“Obamanomics” resulted in trillions of dollars of additional federal debt to maintain the huge output gap and destroy potential output, which the country cannot afford.

There remains massive idle resources, while the economy underproduces by about $1 trillion a year.

Moreover, the weak U.S. economy has slowed the global economy.

The weak U.S. “recovery” is even weaker than reflected in GDP growth, because U.S. trade deficits shrank, which add to GDP growth.

From UCLA Anderson forecast last year:

“U.S. real GDP is now 15.4 percent below the normal 3 percent trend. To get back to that 3 percent trend, we would need 4 percent growth for 15 years, 5 percent growth for eight years, or 6 percent growth for five years, not the disappointing twos and threes we have been racking up recently, which are moving us farther from trend, not closer to it. It’s not a recovery. It’s not even normal growth. It’s bad.”

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It should be noted, the 2001 recession was so mild per capita real GDP growth didn’t fall that year.

Also, the 2001 recession proved the U.S. can have a quick and massive Creative-Destruction process (mostly from 2000 to 2002) in a mild recession (in large part thanks to the Greenspan Fed and the Bush Administration).

The “Misunderestimated” President:

Bush inherited the worst stock market crash since the Great Depression and a recession. However, the Bush Administration turned the recession into one of the mildest in U.S. history, after the record economic expansion and structural bull market from 1982-00.

Over a five-year period in the mid-2000s, U.S. corporations had a record 20 consecutive quarters of double-digit earnings growth, two million houses a year were built, 16 million autos per year were sold, U.S. real GDP expanded 3% annually, in spite of 6% annual current account deficits (which subtract from GDP).

The U.S. economy was most efficient, while Americans stocked-up on real assets and goods, and capital was built-up. It was one of the greatest periods of U.S. prosperity, the fourth longest economic expansion in U.S. history, and in a structural bear market that began in 2000.

The Bush Administration was adept at minimizing the recession in 2008, including providing a tax cut in early ’08 for the Fed to catch-up easing the money supply, until Lehman failed in Sep ’08, which caused the economy to fall off a cliff. However, appropriate policy adjustments were implemented quickly.

If Bush could’ve been reelected and had his way, the U.S. would’ve completed a recovery in 2010, and we’d be in a strong disinflationary expansion instead of this on-going depression and “train wreck.”

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I stated in Feb ’09:

1. Obama should change his stimulus plan to a $5,000 tax cut per worker, along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets [i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc.]. This plan will have an immediate and powerful effect to stimulate the economy and strengthen the banking system. When excess assets and goods clear the market, production will increase.

2. Shift “toxic” assets into a “bad bank.” The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost “animal spirits,” and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

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Massive idle resources are reflected in idle labor (e.g. from weak demand, high household debt, and low income, particularly low-wage income), and idle capital, e.g. $2 trillion held in cash or equivalents (earning enough for capital preservation) by non-bank corporations, and another $2 trillion held by banks in excess reserves (most likely because “too-big-to-fail” is no longer a policy).

It should be noted, prices don’t have to fall, to stimulate demand, profits can rise instead.

Paul Krugman makes an interesting case how the U.S. economy has changed, particularly since 2000 (with implications how a combination of efficiency and regulation, for example, led to lower wages and weaker demand):

Profits Without Production
June 20, 2013

“Economies do change over time, and sometimes in fundamental ways.

“…the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance.

…consider the differences between the iconic companies of two different eras: General Motors in the 1950s and 1960s, and Apple today.

G.M. in its heyday had a lot of market power. Nonetheless, the company’s value came largely from its productive capacity: it owned hundreds of factories and employed around 1 percent of the total nonfarm work force.

Apple, by contrast…employs less than 0.05 percent of our workers. To some extent, that’s because it has outsourced almost all its production overseas. But the truth is that the Chinese aren’t making that much money from Apple sales either. To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.

…the economy is affected…when profits increasingly reflect market power rather than production.

Since around 2000, the big story has been one of a sharp shift in the distribution of income away from wages in general, and toward profits. But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment?

Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity.

And Apple again provides a case in point: It is hugely profitable, yet it’s sitting on a giant pile of cash, which it evidently sees no need to reinvest in its business.

Or to put it differently, rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.

If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don’t think this is the only reason our recovery has been so weak — but it’s probably a contributory factor.”

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What’s sad is the federal government has squandered so much money, and added too many anti-growth policies with the pro-growth policies, resulting in an enormous national debt. I suspect, interest on the national debt will rise substantially.

We need much better fiscal policy and economic policies out of Washington. For example, in a recession or depression, remove or reduce hundreds of billions of dollars of the $2 trillion a year of federal regulations, rather than piling on more massive regulations.

Larger tax cuts and a higher minimum wage would result in less entitlement spending (e.g. unemployment insurance, food stamps, earned income tax credit, and other anti-poverty programs). It’s ridiculous to put restrictions on financial institutions when they’re not needed (e.g. after the crisis) and not put restrictions on them when they’re needed (well before a crisis develops). Fiscal policy needs to be more effective in smoothing-out business cycles, like monetary policy.

Living standards, particularly for low income Americans, can rise much faster with appropriate fiscal and economic policies out of Washington politicians.

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Jazzbumpa, I suspect, banks are holding over $2 trillion of excess reserves (and retarding economic growth), because of the hostile environment, by both Democrats and Republicans, and “too-big-to-fail” no longer exists.

Substantial tax cuts worked under Kennedy, Reagan, and Bush. Given the much higher level of household debt, a bold tax cut was needed more than ever.

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