CBO: “What Accounts for the Slow Growth of the Economy After the Recession?”

“CBO estimates that about two-thirds of the difference between the growth in real GDP in the current recovery and the average for other recoveries can be attributed to sluggish growth in potential GDP.”

From the newly released CBO report:

In the current recovery, both potential GDP, a measure of the underlying productive capacity of the economy, and the ratio of real GDP to potential GDP have grown unusually slowly. Because potential GDP is an estimate of the amount of real GDP that corresponds to a high rate of use of labor and capital resources, it is not typically affected very much by the up-and-down cycles of the economy; in contrast, because the ratio of real GDP to potential GDP depends on the degree of the economy’s use of resources, it captures cyclical variations in real GDP around its potential level. In the first 12 quarters after the last recession, both potential GDP and the ratio of real GDP to potential GDP grew at less than half the rate that occurred, on average, in the aftermath of other recessions since World War II. Disaggregating the unusually slow growth in output since the end of the last recession, CBO’s analysis shows that that pace is mostly owing to slow growth in the underlying productive capacity of the economy and to a lesser extent, to slow growth in real output relative to that productive capacity.

Specifically, CBO estimates that about two-thirds of the difference between the growth in real GDP in the current recovery and the average for other recoveries can be attributed to sluggish growth in potential GDP. That sluggish growth reflects weaker performance than occurred on average following other recessions by all three of the major determinants of potential GDP: potential employment (the number of employed workers, adjusted for variations over the business cycle); potential total -factor productivity (average real output per unit of combined labor and capital services, adjusted for variations over the business cycle); and the productive services available from the capital stock in the economy. Although some of the sluggishness of potential GDP since the end of the last recession can be traced to unusual factors in the current business cycle, much of it is the result of long-term trends unrelated to the cycle, including the nation’s changing demographics.

The remaining one-third of the unusual slowness in the growth of real GDP can be explained by the slow pace of growth in the ratio of real GDP to potential GDP—which in CBO’s assessment, is attributable to a shortfall in the overall demand for goods and services in the economy. To identify the causes of that shortfall in demand, CBO analyzed the contribution of each main component of demand. Compared with past recoveries, this recovery has seen especially slow growth in four of those components:

  • Purchases of goods and services by state and local governments,
  • Purchases of goods and services by the federal -government,
  • Residential investment (consisting primarily of the construction of new homes, home improvements, and brokers’ commissions), and
  • Consumer spending.

Among those four components, purchases by state and local governments account for the largest portion of the unusual weakness.

Figure 4 from the CBO report illustrates the difference in state and local government spending in this recovery.


Source: CBO (2012).


28 thoughts on “CBO: “What Accounts for the Slow Growth of the Economy After the Recession?”

  1. Philip Copley

    If more more and more is spent in excess of what is earned and/or in reserve it must be that credit is being extended. Of course, this can’t go on forever because credit is depleted.
    After credit is depleted you can look at the data and scratch your head. Spending went up and up for so long and then flat lined when the credit dried up. The policy makers want to exprapolate the up and up trend line into the future. They can’t understand how something goes up and and up and the stops going up. They think there must exist some little policy tweak to reset the old trend line. Meanwhile, its obvious that the trend line won’t reset until debts are paid down and credit is extended again. It could take long time. It might never happen. So much for extrapolating.

  2. jonathan

    Can you illuminate something? The report goes on to say that 1/3 of the potential GDP issue is investment spending:
    “Slower growth of capital services accounts for more than a third of the slowness in the growth of potential GDP during the recovery. By CBO’s estimates, capital services in the nonfarm business sector grew by 6.4 percent in the first 12 quarters of the current recovery, compared with an average of 11.7 percent in past recoveries. That reduc- tion reflects a much lower amount of net investment (investment minus depreciation) relative to the existing capital stock in this recovery.”
    Other than accounting entries, how is this not an aggregate demand issue? Are they taking the data and putting them in their accounting columns without looking at why investment is off? Or is this another example of the way we handle the supply versus demand issues in macro?

  3. Jeffrey J. Brown

    Based on WTI crack spreads, US consumers are almost fully exposed to global crude oil prices, and in my opinion the principal reason for the slow growth is the average 17%/year rate of increase in global (Brent) crude oil prices from 2002 to 2011 (with one year over year decline, in 2009), as the developing countries, led by China, have so far consumed an increasing share of a post-2005 declining volume of Global Net Exports of oil (GNE).
    A recent interesting opinion piece in the Sunday NYT, with a very interesting graph:
    Do Tax Cuts Lead to Economic Growth:
    Each point on the following graph, taken from the above article, represents the average annual US economic growth per year over a five year period, starting at that point:
    Note the severe contraction in average five year growth starting in 2002. The author of this article attempts to link faster growth to higher tax rates and slower growth rates to tax cuts, with the peak five year average growth period being from early 1995 to early 2000.
    However, as noted above, the average rate of increase in annual Brent crude oil prices from 2002 to 2011 was 17% per year. I think that the combination of the Bush tax cuts and massive deficit spending, financed by real creditors and massive Quantitative Easing (QE), only served to keep the average five year rate of growth in GDP in our “Wants” based economy after 2002 just barely above zero, as we had to cope with a quadrupling in global annual crude oil prices from 2002 to 2011.

  4. Confused

    I’m (a little) confused …

    I could be (and am happy to be shown to be) wrong, but it looks like the CBO’s analysis assumes there is no such thing as supply-side shocks.

    There’s no mention of the natural level of output (i.e. output stripped of demand-side cyclicality but with supply-side cyclicality remaining) anywhere in the document or any mention of an output gap (i.e. actual minus natural), and what they describe as “cyclical variation of GDP around potential GDP” is pretty clearly a list of only demand-side issues.

    As such, it looks like what they label “potential GDP” should actually be labelled “natural GDP”.

    Can anyone help me out here? If my interpretation is correct, are there any estimates out there of the true potential output?

  5. Bruce Carman

    Causes of the deceleration of trend post-’00 real GDP from 3.3% long term to 1.6%, 0% since ’08, and negative per capita:
    Tripling of the average price of oil since global peak oil production and exports in ’05, i.e., Peak Oil.
    Boomer demographic drag effects: Secular (permanent) shift in the composition of household spending from high-multiplier housing, autos, and child rearing to low-multiplier house maintenance, utilities, insurance, and out-of-pocket costs for medical services, coinsurance, and medications.
    Extreme wealth and income concentration to the top 1-10% of US households in which the top 1-10% receive 20-45% of US income and hold 40-85% of financial wealth. Hoarding of savings in the form of overvalued corporate equities of the Fortune 25-300 firms (revenues equivalent to 40-100% of private US GDP) reduces money velocity and results in the economy being disproportionately dependent upon the discretionary spending of the top 1-10%, which in turn is influenced by overvalued asset prices, particularly equity prices.
    Bank balance sheets remain under pressure, including: (1) a negative real net interest margin after charge-offs with a flattening yield curve discouraging bank lending; and (2) bank charge-offs and delinquencies at 6% of loans, which is 3-4 times the historical average.
    Corporate debt at a record high to private GDP and to private wages will exert a net incremental drag on private investment, production, profits, and employment for years to come.
    Total local, state, and federal gov’t spending, including personal social insurance payments, is at a record high as a percentage of private GDP, exceeding the level of WW II and having been at WW II levels or higher since the 1970s-80s (onset of peak US crude oil production, deindustrialization, and financialization). Given the record share of gov’t spending as a share of private GDP, fiscal deficits of 10% of private GDP, and with Boomers drawing down on elder transfer programs en masse hereafter, it is highly unlikely that gov’t spending will grow hereafter, putting as much as a 1.5%/year drag on nominal GDP.
    Corporate profits after tax as a share of private GDP are at a record high 16-17% compared to the average 10% and 7% at recessionary troughs. Were profits/GDP to revert to the cyclical average or recessionary level, profits/GDP will decline $650-$900 billion, which is an equivalent of 6-9% of private GDP, matching the decline in ’08-’09.

  6. Ray LaPan-Love

    Philips’ comment about the extent of seeming stupidity by policy makers is apt regarding the folly that is offered as analysis. But it seems that Japan’s ability to maintain functional employment levels, while running up their debt to GDP level to an extreme, is showing that the limits of a debt driven economy are well beyond where the the US economy has been during the ‘recovery phase’.
    And the arguments like Jeffrey’s, having to do with energy costs rising, come up short too, because while energy costs are rising… most Americans can and do comfortably use less and thereby there has been little impact on disposable income percentages. And this is what has been happening, and it is of course desirable because Americans have been far too wasteful in these regards anyway. This is not to say though that energy costs are not a factor, but then so are rises in health-care costs and an attrition of higher costs across the whole spectrum.
    The most salient problem is instead that the US economy has become reliant on government spending and excess liquidity. What the analysis typically misses is the fact that the US economy was not providing enough jobs BEFORE the downturn if considerations are made for which jobs were self-supporting, and which jobs were supported by dubious funding. But, unlike the Japanese, American leadership has ignored the labor markets. It has been obvious for decades that US exports could not compete in the global marketplace, and even if there were a solution to the Triffin Dilemma, health-care costs and the high living costs in the US make it necessary to downsize the labor markets, yet… since the Immigration Act of 1965, about a half a million immigrants have been allowed into the US along with ‘who-knows-how-many’ without documentation. And now we have an economy that is dependent on the recycling of the global surplus of dollars, along with dangerous leverage ratios, and government subsidized EVERYTHING, to maintain adequate employment levels, duh.

  7. ReformerRay

    The statistical analysis by the CBO does not necessarily address the causal factors. Why was investment low?
    The comments provide some ideas about causation. Price of oil is a causal factor. Excess construction of housing in the past. Consumer and government debt as one person suggested.
    A causal influence frequently overlooked is the 36 years of a goods trade defict. It is impossible to maintain capacity to produce goods locally when goods imported are in excess of goods exported. Trucks produced in the U.S. and sold in the U.S. contribute to growth of GDP as they are used. Miltary expenditures do not provide benefits comporable to civilian expenditures as they are used.
    Legacy influences will disapper over time. Not so for trade deficits and military expenditures. To get the U.S. economy back on track the Federal government needs a new trade policy aimed at balanced trade with as many nations as possible. Also elimination of mutual defense treaties with as many nations as possible. We do not need troops in Germany and Japan.

  8. The Rage

    The financial crisis. While money was/is being printed to Wall Street to avert anymore systematic risk, main street has had money destroyed.
    It is why the FOMC/UST didn’t do anything in 2007-8 in terms of “printing money”, because they had to wait until Main Street’s money supply started to contract due to Wall Street’s seizure. If they had done it in August of 2007 when they needed to start, it probably would have caused a run on the dollar.
    By the fall of 2008, it was perfect. This is the error inflationistas have made. They didn’t understand the money destroyed was even outpacing the money created. Essentially one part, Wall Street, is getting free money, while the other side Main Street is getting the Gold Standard.
    Now the question is, whether some of that “printed” money starts shifted out of Wall Street and back into Main Street. Could explain some weird things lately, including the election cycle and frankly the 2001-7 expansion weirdness.

  9. W.C. Varones

    This is consistent with Reinhart & Rogoff’s finding that too much debt kills growth.
    Broke cities and states can’t hire more unionized bureaucrats. How long until someone proposes Zimbabwe Ben buys muni bonds to help them out?

  10. Ricardo

    “CBO estimates that about two-thirds of the difference between the growth in real GDP in the current recovery and the average for other recoveries can be attributed to sluggish growth in potential GDP.”
    This has to be one of the dumbest statements I have read on economic recovery. CBO talks about “estimates” of a real recovery then the sluggish growth of “potential” GDP. If ever there is a sentance based on Sudoku this is it. We attribute econoic growth to estimates and potential and all kinds of economic speculations and imaginations while ignoring the actual production and distribution of real goods and services that cause people to trade in the first place. I wish we could imagine our way past economic scarcity but no amount of Sudoku will ever change it from simply a game.

  11. Steven Kopits

    Ray LaPan –
    Let me comment on Jeffrey’s numbers, with which I largely agree but calculate differently.
    In normal times, 3.0% GDP growth is supported by 1.8% oil consumption growth in the US. The difference, 1.2%, is provided by efficiency gains.
    Now, in recent times, US oil consumption has been declining by 1.6%, and this is entirely consistent with my October 2009 article entitled “Peak Oil Economics”. From this article, we also know this trend is likely to continue.
    Thus, 3.0% GDP growth would require 3.4% (1.8% + 1.6%) increased efficiency gains, and 4.6% efficiency gains in total (3.0% GDP growth + 1.6% oil consumption declines).
    Now we know from the UMTRI that new vehicle average mileage is increasing by 3.7% per year, keeping in mind that this is only for new vehicles, not the vehicle fleet as a whole (which will by definition be less).
    But even if we allow 3.7% as the actual efficiency gain for oil in the economy, we are still 0.9% short of the pace needed to maintain 3.0% GDP growth. Thus GDP growth would be capped out around 2%, and maybe a somewhat lower.
    And we can see this in vehicle miles traveled (VMT). For the three months ending October (compared to the same period previous years), US VMT is
    – up 0.4% on Oct. 2011
    – down 1.6% on Oct. 2010
    – down 0.3% on Oct. 2009 (US in recovery)
    – down 0.4% on Oct. 2008 (US in recession)
    Clearly, efficiency gains to date have not been able to compensate for declining oil consumption. This would appear to be a red flag, something which would feature prominently in analyses of the path of GDP.
    But is the topic even remotely mentioned in the CBO report? Has Menzie ever posted on this topic?

  12. tj

    How do renewables figure in the efficiency gains? It seems renewables divert more investment and resources to energy production and away from other, more productive, uses.

  13. Jeffrey J. Brown

    Incidentally, Steven Kopits is one of several excellent featured speakers at the 2012 ASPO-USA conference in Austin, Texas on 11/30/12 and 12/1/12.
    We are focusing this year on a smaller number of high quality speakers, including Michael Kumhof, with the IMF, and Mark Lewis, head of global commodities research with Deutsche Bank. They will be participating in a session on Global Production and Net Export Scenarios.
    Also, Art Berman will be participating in a session on North American oil & gas production.
    Even if one does not completely buy into what I call the “Finite Earth Theory,” it’s always useful to at least listen to contrary points of view (and at the conference, there will be speakers outlining more optimistic production scenarios).
    One of our key goals this year was to leave more time for audience interaction, via a Q&A, and I think that Jam Mueller, Executive Director of ASPO-USA, and his team have done a great job puttng the conference together, with some invaluable insistence from the University of Texas, where the conference will be held.

  14. Menzie Chinn

    jonathan: It’s partly labeling, partly conceptual. Usually recessions don’t have a large impact on potential GDP. The depth and duration of this one, combined with the slow recovery has resulted in a measurable deceleration in capital accumulation, and hence potential GDP growth. Best to look at in a AD-AS graph over time.

    Confused: In the framework they are using, the two should be the same. In a New Keynesian framework, potential and natural would differ — but not in the way you say; see here.

    Steve Kopits: here.

  15. SecondLook

    I personally like to take a longer term look at GDP.
    Here’s another perspective (using data ending in 2011)
    Past 5 year GDP average: .21%
    10 year average: 1.6%
    20 year average: 2.53%
    40 year average: 2.74%
    A set that I think is more significant: Per capita GDP growth rates:
    Past 40 year GDP average: 1.7%
    20 year average: 1.48%
    10 year average: .7%
    5 year average: -.61%
    One can draw various conclusions, but mine is that when looking at GDP over time, and particularly using per capita data, there clearly seems to be a leveling trend – irrespective of various policies and conditions.
    Or, to put it more technically, the sigmoid function may very well apply to modern mature economies…

  16. Bruce Carman

    Menzie, et al., please the following charts of the trend real GDP per capita, global and US crude oil production per capita, etc.:
    The decelerating trend rate of real GDP per capita is a function of demographics, the cost of energy per GDP and per capita, and debt per capita and GDP of the Long Wave.
    And a good Peak Oil video:
    Population overshoot, per-capita peak global oil production and oil exports, debt to GDP and per capita, gov’t spending to private GDP, and per-capita falling net energy, arable land, water, and phosphorus combine to imply growth of real GDP per capita is no longer possible.
    The end of growth, and thus capitalism that requires perpetual growth of profits and capital accumulation, has arrived. Each Long Wave/Schumpetarian techno-economic paradigm has transitioned to a successively higher punctuated equilibrium of energy and materials consumption per capita as a result of a new energy paradigm, e.g., human and animal energy power to wood to coal to crude oil and natural gas.
    But there are no (not yet) sufficiently energy-dense substitutes for crude oil at the existing exergetic equilibrium at the desired standard of material consumption per capita we have enjoyed for more than a half-century, especially in the West. Now the rest of the world wants to replicate the western standard of material consumption (thanks to US supranational firms seeking investment and consumer markets), but this time with 7 billion people instead of when the West began in the 18th-19th centuries when the population was 700 million to 1 billion.
    China-Asia and the rest of the world is 40-80 years too late to repeat the oil- and auto-based model of economic development on a finite, spherical, warm, wet third rock from an insignificant star far, far away from the center of the unknown multi-verse.

  17. 2slugbaits

    The CBO report was thoroughly depressing. We put the squeeze on immigration and then wonder why the demographics for labor supply growth are so dismal. We cut teachers and education spending and then wonder why multifactor productivity growth has been disappointing (CBO says it represents one-fifth of the drop in potential GDP). The Wicksellian labor clearing interest rate hits negative six percent and we wonder why private investment was so poor during the first nine quarters of the recovery. Meanwhile some commentators are crying Zimbabwe and warning about the Weimar experience. And then long term unemployment erodes skills and further detaches people from the workplace while the WSJ writes op-ed pieces about “lucky duckies” who don’t have to work. Good to see that the CBO gave Casey Mulligan’s paper the attention it deserved; viz., buried deep in a footnote.
    Simon Wren-Lewis had an interesting piece on potential GDP as well. The econometrics behind the decomposition of observed GDP into real and potential can be pretty tricky. But policy choices shouldn’t be that difficult. If there is still a lot of room for cyclical adjustments, then stimulative fiscal policy would help close that real output gap. If CBO’s view is more correct, then the worst case result of more fiscal policy would be higher inflation. The risk of higher inflation seems like a small price to pay.

  18. Steven Kopits

    Tj –
    On renewables. Renewables are only a very small share of the economy, and they do not affect transport, by and large.
    The effect of oil on the economy is postulated (by me) to be mediated through mobility, ie, we need oil for transport and there are no ready alternatives in volume. Oil is unique in that respect, and for that reason, we have no coal shocks, nat gas shocks or gold shocks, for example.
    I would point out that, like Boone Pickens, I believe we should bring nat gas in as a transportation fuel–and that will happen (that’s another analysis, though). The risk is, if nat gas becomes a transportation fuel, and we are also relying on nat gas for our primary electric power fuel, then an oil shock can also translate into a power shock. Therefore, I argue that we have to be careful about relying excessively on nat gas at current prices for power generation. (You can understand why I’m popular in coal and offshore wind circles.)
    In any event, for the moment, renewables are not a driver of shocks of any sort at the national level.

  19. Steven Kopits

    Yes, Menzie, I read Some Thoughts on Energy Independence, linked above.
    Let me highlight the differences between your and my view of oil markets. In the post, you write:
    “the quantity of oil imports (in real units) is decreasing, as shown in Figure 2. This is probably a short term phenomenon; with resurgent growth, the volume of oil imports should increase.”
    No, they won’t. Here’s why. Oil (petroleum liquids) production for 2030 is variably estimated at 103-107 mbpd by BP, Exxon and the EIA; and at 95-96 mbpd by the IEA and Total, for example. No one is above this level for their forecasts. Current production is around 90 mbpd. Thus, the very high end of 2030 production forecasts are 15-20% higher than today.
    Now, we know China’s demand is likely to develop along the lines of other countries, for example, Korea and Japan, and this would give China a propensity to consume oil at 0.5-0.6x US levels per capita at steady state, which a reasonable forecast would put around 2030 or so.
    Do the math, and China comes out 2.2-2.5x US oil consumption, whereas it’s currently about 0.6. And China is about half demand growth. If you try to fit the numbers pro rata into 107 mbpd of supply, you’ll see that US consumption has to decline to 12-14 mbpd to 2030, from 18.5 mbpd today. The decline rate is about 1.5% per annum, albeit not necessarily evenly distributed in time.
    To argue against this, you must believe that the Chinese will continue to ride bicycles when their purchasing power should, by rights, entitle them to the same nature of transportation as the Koreans across the border. You may wish to bet against China; I for one am a Sinophile.
    In any event, unless you buy the view of China as a backward country–“and we like it that way”–there’s just not enough oil to go around, and the incumbents will have to cede oil consumption–which in fact they have and are. This has nothing to do with national or individual merit, and everything to do with the fact that the warlord period and later communism effectively eliminated China from global markets. China today is just catching up to where it would have rightfully been if communism had not held it back. In this sense, it is US or OECD oil consumption levels which are anomalous, not China’s rising claim to its rightful share.
    As a result, barring some unforeseen revolution in oil production, US oil consumption will decline.
    The question that you must then answer is whether you think this matters. So we are talking elasticities again. And if you’re talking potential GDP, and you haven’t even taken the time to look at GDP-to-oil elasticities, then you are flying blind.

  20. ScottB

    Thanks to all for your comments. I have downloaded the Kopits article for further review. I haven’t really considered the role of oil prices and production on the economy in the last decade.
    In my view, we have an “overdetermined” downturn. The financial meltdown certainly had a lot to do with it. As did debt: as Greenspan and Kennedy point out, without mortgage equity withdrawals made possible by the housing bubble, there would have been zero recovery from the 2001 recession (MEW accounted for about 8 percent of disposable personal income during that period).
    My concern for the energy experts on this blog is that you too often seem to ignore or downplay the effects of exploiting non-renewables, particularly carbon emissions and fracking’s ‘downstream’ effects. Proper pricing through capturing externalities would, in my opinion, greatly change the energy market.

  21. Jeffrey J. Brown

    The following extrapolations for Saudi and global net exports, based on six years of data (2005 to 2011), appear to be impossibly pessimistic, but then we have the combined Six Country Case History (Indonesia, UK, Egypt, Vietnam, Argentina, Malaysia), which are all now members of AFPEC (Association of Former Petroleum Exporting Countries). An extrapolation of six years of data for the Six Country Case History was too optimistic.
    In order to estimate CNE (Cumulative Net Exports) from an exporting country whose production has shown an inflection point, i.e., either a production decline or the start of an “Undulating Plateau,” I extrapolate the multiyear rate of decline in the ECI ratio (ratio of total petroleum liquids production to liquids consumption) to estimate when the ratio would = 1.0 (when production = consumption).
    Given the tendency for net export declines to show an “Shark fin” pattern, I multiply the annual net exports, at the inflection point, times the number of estimated years to zero net exports, times 0.5 (to get the area under a triangle), less annual net exports at peak. That was my “Cowboy Integration” method for the following four estimates:
    All of the following estimates are based on extrapolating six years of declining ECI values or declining GNE/CNI values (1995 to 2001 for the Six Country Case History and 2005 to 2011 for Saudi and global data):
    Estimated Six Country post-1995 CNE:
    9.2 Gb (billion barrels, total petroleum liquids)
    Actual Six Country post-1995 CNE:
    7.3 Gb
    Estimated Remaining Six Country post-1995 CNE, at the end of 2001:
    3.7 Gb
    Actual Remaining Six Country post-1995 CNE, at the end of 2001:
    1.8 Gb
    Note that the actual Remaining Six Country post-1995 CNE number, at the end of 2001, was about half of the estimated value.
    Estimated post-2005 CNE for:
    Saudi Arabia: 45 Gb
    GNE: 445 Gb
    ANE: 168
    Estimated Remaining post-2005 CNE, at the end of 2011, for:
    Saudi Arabia: 28 Gb
    GNE: 349 Gb
    ANE: 87 Gb
    Annual net exports in 2011 for:
    Saudi Arabia: 3 Gb/year
    GNE: 16 Gb/year
    ANE: 12.8 Gb/year
    Estimated Remaining post-2005 CNE, at the end of 2011, divided by 2011 annual net exports per year, for:
    Saudi Arabia: 9 years
    GNE: 22 years
    ANE: 7 years
    This is of course analogous to an estimated R/P ratio, and of course, even if approximately correct, countries don’t produce or export at a flat rate for a number of years and then go to zero, but it’s a useful metric.
    Some definitions:
    Six Counties: Indonesia, UK, Egypt, Vietnam, Argentina, Malaysia
    GNE = Top 33 net exporters in 2005, BP + Minor EIA data
    ANE = GNE less Chindia’s Net Imports (CNI)
    GNE/CNI = Ratio of Global Net Exports to Chindia’s Net Imports
    ANE (2002 to 2011):

  22. Bruce Carman

    Steven, as to your being a Sinophile, I would remind you that westerners have been dreaming of getting rich from the Middle Kingdom for centuries, and every 50-60 years (the Long Wave Trough) their desires have turned to fleeing the country under conditions of financial, economic, and social unrest and political reaction.
    Further, China has reached the so-called “middle-income trap” phase of development of the auto- and oil-based modern western model with a GDP per capita (PPP) of $7,000. The US achieved this milestone in the late 1920s; former Commonwealth nations of Canada, Australia, and New Zealand during WW II; western Europe in the 1950s; Ireland and southern Europe in the 1970s; Argentina in the 1960s; Mexico in the early ’00s; Japan in the late 1960s; and South Korea and Taiwan in the 1980s.
    It required China a little more than a half-century to reach the milestone it took the US nearly a century and a half and Japan nearly a century.
    However, China (nor Japan and the “Asian Tigers”) would not have achieved such an unprecedented rate of growth of development were it not for trillions of dollars of western and Japanese investment, trade credits, reinvested profits, and technology transfer to China. China’s debt-induced fixed investment boom since the late ’90s to date is the largest credit and investment bubble as a share of GDP in modern world history, and perhaps in all of history for which reasonable estimates can be made (save for the Egyptian pyramids and Great Wall). All bubbles burst, but there is no precedent for the scale of bursting of such a bubble except for the US in the 1930s and Japan since the ’90s.
    Moreover, the US and Japan reached their middle-income trap phases with the constant-dollar price of oil averaging well below $20, and for extended periods at or below $15. China, however, faces her milestone with $85-$110 oil, water and electricity shortages, desertification of arable land, peak coal production, increasing oil imports as a share of consumption, growing food imports, and peak demographics set to roll over and become effectively a permanent drag on growth hereafter.
    China (and the rest of developing Asia) is 40-80 years too late to the western auto- and oil-based model of development. Consequently, China faces a Great Depression-like contraction were FDI to GDP to contract by as little as 1-1.5%, owing to the large FDI multipliers to investment, production, and exports.
    Those who expect China to “rebalance” the composition of GDP from investment and exports and more towards consumer spending will likely be surprised when they are correct, but not for the reason they anticipate. Consumption will become a larger share of GDP but primarily because investment, production, and exports will collapse along with the GDP, resulting in consumption becoming a larger share of the GDP by default.
    Once western and Japanese investment starts to flow from China, which appears to have begun, a hard landing is ahead for the Middle Kingdom.

  23. Orson

    I agree with the view that it is impossible to be well-versed in microeconomics, while being leftist, but being a macroeconomist does enable enough wiggle-room to also contain leftist thought.

  24. JBH

    Causal factors. The US, indeed all Western Civilization, no longer has a surplus. Investment in net new capital stock to raise productivity is being funded by the saving of other countries. Such borrowing from the rest of the world cannot go on. The euro crisis is firsthand empirical evidence of this. Europe has been in recession for a year with no end in sight. The US sovereign debt is now in the Reinhart Rogoff potential GDP damage range thanks to trillion dollar annual deficits. It’s moving deeper into that range meaning in coming years potential GDP will be constricted even more. Investment cannot be financed out of net national (dis)saving, negative all four years under Obama for the first time since the Depression. Eighty years of liberal growth of the welfare state is causal of this long trend. Saving ethic, personal responsibility ethic, work ethic – all have eroded the past 60 years. Public education unions calcify C-students who major in education into tenured primary and secondary school positions that according to international standards fail to teach our youth. The quality of US human capital is falling.

    The redistributionist tone of the Obama administration has affected the animal spirits of business. The likes of this has not been seen since FDR. The anticipation of Obamacare decimated spending on new projects, ordinary expansion, and hiring. Policy and economic uncertainty as measured by Bloom et al is highest in modern history. Obama ramped up regulation and management by executive order way beyond the wishes of Congress. This will go on steroids the next four years, and every business in the country knows it. Crony capitalism and the revolving door between special interests, Wall Street, and politicians and government appointees has institutionalized the instruments of production damaging their efficacy probably beyond repair. No one goes to jail for this. The morality of the country is in decline.

    This president has divided the country, class against class for political and ideological ends. In its death troths, mainstream media is actively abetting these forces. Average Americans have no grasp of economic causality as a consequence. As in any complex dynamic system, when the decades-long credit bubble burst it caused a wrenching discontinuity. There is a double hinge to this discontinuity; the credit bubble artificially inflated economic growth for years leading up to the crisis, and now the necessity to deleverage is ratcheting growth down. The hollowing out of growth potential by these deeper causes is now exposed. The CBO analysis is superficial, all gloss appealing to policy wonks who think it means something but tapioca on real understanding.

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