Real GDP Growth by Decades

GDP Growth Under Last Four Presidents (Or What Trump Lied About This Time)

This morning the new GDP numbers were announced here. The numbers compare the second quarter of 2019 with the second quarter of 2018.

GDP is up 2.1% for 2Q 2019
Personal consumption is up 4.3%
Private domestic investment is down 5.5%
Exports are down 5.1%
Federal government spending is up 7.9%

So what does this mean in simple English?
GDP growth was below average. Since 1993, quarterly growth has averaged 2.6%. Hitting 2.1% rather than 2.6% is a difference of $100 billion. ($107 billion, to be exact. Which works out to about $300 per American.)  GDP rose because personal consumption and government spending is up and in spite of the fact that exports and investment are down.

It's dicey to play psychologist based on one quarter but this suggests that the great job market, long boom and easy credit have made American consumers more comfortable buying stuff. So personal consumption is up.

Meanwhile, Trump's constant trade war talk has made businesses nervous about investing more and has already hurt their ability to sell to foreign markets. So business investment and exports are down.

Households are comfortable and businesses are nervous. It's tough to sustain increases in household and government spending when investment and exports are dropping.

There is another element worth noting. I've heard from more than one Trump supporter that GDP growth under Trump has been unprecedented and that he's hit quarterly growth levels that Obama thought impossible. Like so many of the claims originating from the fake president, this is an absurd claim that quickly dissolves on contact with facts. 

This graph shows quarterly GDP growth for the last four presidents. Specifically, it shows the average for each one (blue bar), their highest quarter (orange), their lowest quarter (gray) and the difference between the average of their first three quarters (the economy they inherited) and the average of their last three quarters (the economy they left for the next president) (yellow). 

Studying this graph quickly makes a few things obvious. 

Trump has the lowest high. In his best quarter, GDP grew by 3.2% from a year earlier. For Clinton, Bush, and Obama, the highs were 5.3%, 4.3%, and 4.0%. GDP is not growing at unprecedented highs under Trump. It is not even growing at precedented highs. Clinton, Bush, and Obama all had better quarters. (Clinton alone enjoyed 24 quarters of better GDP growth than Trump's best quarter. 24.)

Bush inherited a great economy and made it worse, GDP growth dropping by 2.8 percentage points from what it was in his first three quarters to what it was in his last three quarters. Obama inherited an awful economy and made it better, GDP growth increasing by 5.1 percentage points. Clinton inherited a decent economy and made it great, increasing GDP growth by 1.3 percentage point. Trump? Trump hasn't really changed things. He inherited a good economy and made it somewhat better, an uptick of 0.3 percentage points from his first few quarters to his most recent three. It is fascinating that so many of his critics who thought he would blow up the economy (in a disastrous way, as I did) and so many of his supporters who thought he would blow up the economy (in a great way), have found themselves in the calm before a clear direction. For the most part, the economy has continued on the same trajectory in which he found it.

Of course none of this is what he promised.

Trump promised GDP growth of 4, 5 or 6% after he passed his tax cut. (Video here.) He's currently averaging 2.6%, about two-thirds of what the economy averaged under Clinton and less than half of what he promised. It's not just that his tax bill has doubled the deficit; it has failed to make any discernible change in GDP growth.

If he just shut up, the economy might do better. Businesses might invest more and find it easier to sell abroad without dodging the tariffs of Trump's trade wars. Of course expecting Trump to shut up is like expecting the heads on Mount Rushmore to speak out. 

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Catherine Rampell puts the surge in government spending into perspective.

Red State, Blue State, Old Jobs, New Jobs

Edward Glaeser's Triumph of the City [2011], opens with some statistics that illustrate the remarkable contrast between big city productivity and smaller city or even rural productivity.

About half the US population "crowd together in the 3 percent of the country that is urban." "Workers in metropolitan areas with big cities earn 30 percent more than workers who aren't in metropolitan areas." And the bigger the city, the more this effect is exaggerated. "Americans who live in metropolitan areas with more than a million residents are, on average, more than 50 percent more productive than Americans who live in smaller metropolitan areas. These relationships are the same even when we take into account the education, experience, and industry of workers. They're even the same if we take individual workers' IQs into account." {emphasis added]
"On average, as the share of a country's population that is urban rises by 10 percent, the country's per capita output increases by 30 percent. Per capita incomes are almost four times higher in those countries where a majority of people in cities than in those countries where a majority of people live in rural areas."

GDP is measured by exchange. Big networks make it easier for people to easily exchange goods, services, and ideas. If you live in a rural area, two miles from your nearest neighbor, it is much harder to exchange anything than it is if you live in a densely populated area where a million neighbors are within a mile. Bit city networks are rich and complex; rural networks are sparse.

City of the Future, Lev Rudnev, 1927

There is so much to this but one comes from openness to innovation. Cities are like diversified portfolios. If you own 50 different stocks, you just accept that one (or two or four or ten) will shrink in value as markets shift; your entire portfolio may well do better in disruptive, tumultuous markets because the one (or two or four or ten) stocks that thrive through this change could create wealth that is worth multiples of what you lost in the bad stocks. The investor who owns one or two stocks sees big change as a threat because if one or two of her stocks collapse in value, the whole portfolio does. There is so much going on in a city that its people can more easily adapt to innovation and disruption. You get laid off from one failed startup and you go to work at another. In a rural area, if you get laid off from a company you may literally need to move out of state. And as a people become more open to innovation and disruption, they create more value over time than people who try to conserve what they have and protect themselves from change.

As an economic model, cities just work better than rural areas. To the extent that the country moves in the direction of what works best for rural areas, it will generally move in the wrong direction for economic progress.

Magic Math in Trump's Budget: How an Imaginary $2 Trillion Gets Spent Twice

Trump's new budget plan forecast $2 trillion in additional revenues because of economic growth and then simultaneously applied that $2 trillion to a tax cut and to a deficit reduction. This faster economic growth will both increase revenues in the form of higher taxes and fund a tax cut in the form of lower taxes. Wrap your mind around that.  It is as if Trump's Budget Direct Mick Mulvaney (people say he's Irish but it seems clear that he's a goblin) said, "The amount we get in extra taxes will pay down the deficit AND will let us cut taxes by that same amount." It's like someone has won $100,000 in the lottery and excitedly announces their plan to pay down their $100,000 in debt and spend $100,000 on new cars and travel. It's double counting.

It might be that the Trump administration is that sloppy. Or it might be that they trust that they have so undermined the credibility of the press by continually calling it fake news that they will be able to ignore or brush off any reporting that points this out. They are operating in a fact free zone.

If that's not enough, there is more. Where does this extra $2 trillion over 10 years come from? It's existence comes from an assumption that the economy will grow by 3% a year for a decade. How likely is that?

Well, since 1948, the longest stretch during which GDP growth exceeded 3% was 6 years. (From 1961 to 1966, when Johnson's New Deal was increasing government spending, defense spending for Vietnam was just ramping up, and the baby boomers were starting school and driving their parents to buy more housing, clothes, and cars.) It has been eleven years since GDP growth has been as high as 3% (exactly 3% in 2005, and 3.1% the year before that.) In this century - since 2000 - GDP growth has not even averaged 2%, much less 3%.

So is there reason to believe that economic growth will bump up 50%? (3% is 50% more than 2%.)

Curiously, per capita GDP growth has been incredibly stable since after the Civil War. Here it is by decade. (Source data here.)

Note that in only one decade has per capita GDP growth been more than 3%; in the 1940s, when the US was spending a huge amount of money first fighting Nazis and then rebuilding Europe and Japan, per person GDP growth was nearly 4%. World War 2 was the catalyst. Pull out that decade and you can see that per capita GDP growth has never averaged 3% for a decade. 

And here is a phenomenal statistic. Pull out the 1940s and the average per capita GDP growth since the 1870s has been 1.88%. The average GDP growth in this century? 1.88%.

GDP growth bounces over 3% in healthy and normal decades but it does not stay much above 2% for any length of time without a growth in the workforce. A growth in the workforce depends on immigration and birth rate.

So, will GDP bounce up to 3% for a decade? Only if Donald decides to encourage immigration. (Insert laughter here.) Millennials will cause a growth in the workforce during this next decade to offset baby boomer retirements but it won't be enough to cause a noticeable surge. 

Trump's budget plan doesn't just use the same $2 trillion to simultaneously pay down debt and cut taxes. It forecasts this additional $2 trillion by assuming GDP growth we've only experienced in one out of the last fourteen decades. It's not just that he and Mulvaney are spending this money twice; it's imaginary money.

83% of what Trump says ranges from half-true to pants on fire. Only 17% of what he says is mostly true or simply true. It's little wonder that with such disregard for facts he would put out a plan that shows such utter disregard for simple arithmetic or reasonable assumptions. He continues to show his contempt for Americans' ability to reason. So far, assuming that we're all stupid has worked out well for him. It doesn't seem like it'll work out as well for the rest of us.