A Look Back at 2013 – An Assessment of the American Economy

A Look Back at 2013 – An Assessment of the American Economy
By Dr. Bill Watkins
December 18, 2013

It’s been six years since the Great Recession started, and 4 1/2 years since the recovery started.  It’s appropriate now to step back, look at the big picture, and see where we are.

Two big measures are up.  Economic activity (GDP) is way up from pre-recession levels.  Personal consumption is up even more.  For consumption to increase faster than GDP requires an increase in debt, a decrease in savings, or both.  Debt has gone up, a lot.  Changes in savings have been pretty interesting.  Government savings are way down, while personal savings are way up.  This is exactly what Ricardian equivalence theory predicts (a new economic theory that emerged in the last several years whereby households look to the future and plan their savings, and even their future taxes, by saving more).  People who will eventually pay the government debt appear to be saving to be able to pay it when due in the form of higher taxes.

Consumer surplus is an economic term that we use to describe the increase in consumer utility in excess of the price of a consumer good.  We don’t have a way to measure consumer surplus, but the concept is important.  Since the recession started, consumer surplus has almost surely grown faster than GDP.  This is a result of rapid technological change.  Many free, or almost free, tablet or phone apps replace physical things, things that cost a lot.  On my devices, for example, I have books, drum machines, tuners, and metronomes.  These provide at least as much utility as stand-alone units, maybe more because of convenience and portability.  Since utility has remained the same or increased while prices have plummeted, consumer surplus must be growing rather rapidly.

Not all economic measures are better than they were before the recession.  Wealth, for example, has recovered most of its losses, but it still remains a bit below its pre-recession high.  Jobs have not recovered, either.  We’re still down over a million jobs from the 138 million pre-recession peak.  We need more than that to recover, because our population has been steadily increasing.  As it is, our labor-force participation rate is currently the lowest it has been in decades.  Part of that decline is demographic and expected.  Another large part, tragically, represents discouraged workers, workers who see their job prospects so diminished that they have quit trying.

Unfortunately, incentives for job creation are decreasing.  Obamacare, for example, has multiple disincentives for employers to add jobs.  Recently, there have been multiple initiatives to increase minimum wages.  If successful, these initiatives will also slow job growth. This is America’s most pressing problem.  Persistent or sustained unemployment is a tragedy.  Families and lives are destroyed.  Social pathologies such as teen births, domestic violence, serial relationships, child abuse, drug abuse, and crime all increase with sustained unemployment.  This is why we support abolishing the minimum wage and replacing it with an earned income tax credit, one that always maintains a marginal tax rate of less than 100 percent.  This would be far cheaper than the social costs caused by sustained unemployment, and it would give the recipient more than any social program can provide.  It would give the recipient the dignity that comes with contributing to society.

Lately, some people have been worrying that the probability of recession is increasing.  One reason they give is that the recovery, while extraordinarily weak, has been relatively long-lived.  We disagree with this view.  It assumes that the probability of a recession increases with the length of the recovery.  Instead, we believe that recessions are caused by shocks, such as an increase in the price of energy, and that these shocks are independent of the length of the recovery.  That doesn’t mean the probability of a recession isn’t increasing.  Certainly, the negative incentives in Obamacare and increases in the minimum wage, by themselves, increase the probability of a recession.  Weak economies in Europe and Asia also increase the probability of a recession. Those risks are offset, at least in part, by the dramatic changes in America’s energy sectors.  Vast new oil and natural gas resources have been discovered or made accessible by new technologies.  These opportunities provide powerful economic momentum.  A recession is always possible, but we at the Center for Economic Research Forecasting don’t think the probability, on net, has significantly increased. Let’s hope not.

If you have any questions or comments about this update, please contact Vision Economics at 805-987-7322

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