President Trump and former President Obama are arguing over who deserves credit for the economy’s performance. Given the less-than-ideal numbers for labor force participation, I’m not convinced we should be celebrating.
Regardless, here’s a quick assessment of whether Obama deserves praise, taken from yesterday’s interview with Neil Cavuto.
To elaborate, I generally don’t blame presidents if there’s a downturn as they take office. In many cases, such a downturn is baked in the cake thanks to bad monetary policy before they ever took office.
But I do hold them at least somewhat accountable for the economic performance after the recession. More specifically, is there strong growth for a year or two, allowing the economy recover the lost output? And does the economy then stabilize at the long-run trend of 3 percent growth (as illustrated by this chart showing U.S. growth from 1870-2008).
Remember, there is no substitute for long-run growth if the goal is higher living standards.
Yet we didn’t get that growth under Obama. We didn’t get a period of above-average growth, which meant we never recovered the lost output from the recession. We never even got back to the historical trendline.
Here’s a chart from Business Insider that reviews what has happened over the past 10 years. As you can see, we haven’t come close to our potential GDP. This is why Obama deserves bad marks.
But this doesn’t mean Trump deserves good marks.
First of all, it’s far too early to give a final grade. And, for what it’s worth, his interim grade is not that great. Good policy on taxes and red tape is being offset by bad policy on spending and trade.
Let me also say something semi-positive about the Obama economy. We may not have enjoyed strong growth, but the economy continued to expand. And if the economists who argue that there are structural reasons causing permanently lower potential growth are correct, maybe Obama did okay (my view is that “secular stagnation” is driven mostly by bad policy choices, so I’m not overly sympathetic to this hypothesis).
Regardless, Obama largely didn’t do anything destructive after his first two years (when we got mistakes such as the fake stimulus, Obamacare, and Dodd-Frank). Indeed, we even got some good policy later in Obama’s tenure, though the overall effect of his policies was negative.
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Sure, Zorba! Here are a few return comments:
I understand compound growth and its power. Where I quibble (slightly) is your underlying assumptions about growth. And maybe absolute vs relative wellbeing.
By the way, your example of 1.5% growth is not what I meant by ‘decent’ growth rate. If we assume the 50k income country grows at a decent rate of 3%, it takes 85 years for the 10k income country to catch up.
The issue is, will the poor country maintain 2% higher growth for eight or nine DECADES? Maybe not.
Regarding convergence, there might be several reasons why it happens. I agree, one reason is newly rich countries like to increase govt intervention, then their growth rate slows. But since this almost always happens, it’s obviously hard to avoid!! So it’s a valid reason why the growth rate of rich countries slows down.
I also think there are some ‘technical’ reasons why the growth rate of rich countries slows down. Sort of like diminishing returns. Country A improves its private property rights, and generates much higher growth rates for a while, but then that nice institutional move is completely baked into the economy and the growth rate subsides.
The fact is, no developed country has grown at 5% for a century. Accelerating world growth rate since WWII is not because developed economies have figured out how to grow at 4% plus. It happens when more less-developed countries grow at 5-10% in addition to developed economies growing at a decent rate. But I doubt those less-developed countries will grow at 5-10% for a century. (I’m using real, inflation-adjusted rates.)
As for absolute vs relative wellbeing, I kind of agree with you. It don’t like the idea of falling behind on a relative basis. I just objected to people being ‘toast’ if their income falls behind. Venezuela is probably not a good example for you here. Their incomes have fallen in both absolute AND relative terms. Western Europe is probably a better example. I know, we don’t want their low growth, either.
John,
Thanks for giving me the opportunity to elaborate, I have not written a long comment in a while 🙂 …
I may have exaggerated words (perhaps decline is not “toast”) but not the outcome – the decline. Let me explain using your writing, because this is truly the A to Z of future prosperity:
“First, starting point matters. If a rich country like the US grows at 3%, they will still look okay compared to most for many years. That is, a current lead and a decent growth rate can keep a country high in the ranking.”
I’m not sure what you mean by “keep a country high in the ranking”, but this seems to me one of the most common misconceptions. A country with a lower growth rate cannot stay indefinitely in the high ranking, REGARDLESS of the starting point. So long as growth rates remain unequal, an initial large advantage only delays the time of convergence, not whether the faster growing country catches up or not – and at a, say, 3% growth divergence the once prosperous leader loses its ranking quite fast – in decades, not centuries. Perhaps the fallacy comes from the fact that a rich country at a slow growth rate still adds more absolute per capita income every year compared to a poor country with a higher growth rate — BUT ONLY IN THE BEGINNING. Eventually the higher exponent catches up – always! This is just the arithmetic of exponents. To illustrate the point, I made a simple spreadsheet. Enter whatever initial per capita income disparity you want. The country with a higher growth rate always catches up to the slower growing one, regardless of starting point.
https://www.dropbox.com/s/2nkzdmm8vbj0mo9/Growth%20rates%20and%20prosperity.xlsx?dl=0
You can download the spreadsheet and play with the numbers.
For example, using the numbers in the spreadsheet, a country with a 5% growth rate and a starting per capita income of $10k catches up to a richer country with an initial 50k per capita income and a 1.5% growth rate – in just 48 years ! – e.g. well within the lifetime of a swank European millennial statist voter-lemming who typically thinks low growth is his grand kids’ problem, simply because his own grandfathers were also some of the most prosperous people worldwide two generations ago.
“Second, if any rich country grows at a decent rate (say, 2.5 to 3 percent) they will not be ‘toast.’ They will still be rich, and getting richer. Yes, their lifestyles may fall behind some other countries. But it will still be a very good lifestyle and even better than today.”
This is a very true and very optimistic point which I agree with. Life on this planet is getting better for everyone. The overwhelming majority of people today (even in poorer countries) are much better off than most humans who ever lived on earth.
…However, in the end, we do judge things on a relative scale (especially leftists, actually). If absolute wealth were all that mattered then Venezuelans should still be ecstatic today as they still are much better off than virtually any human who lived a century ago, or earlier, including English aristocrats, some of the wealthiest humans of the time. Similarly, by the much higher (and truly unimaginable to us today) standards of the future, countries on a low growth trendline will be relegated to a wretched prosperity ranking, even if they once led the world. That will not “still be a very good lifestyle”. Sort of an Argentinian trajectory, except that it will happen much faster, now that everything human is moving faster than ever before in human history, and accelerating!
“Third, convergence theory says that it’s difficult for low-income countries to raise incomes all the way to rich country levels. Easy to get to 2/3 or 3/4, but harder to get to 100% or higher. It can be done, of course. However, there’s no guarantee that all or even a majority of low-income countries will successfully do so.”
That is true. However, I see convergence theory as an empirical observed result that has other causes. Convergence is not destiny by itself. In my view convergence theory is true in many (but not all cases) because the voters of high growth countries fall in the Lula da Silva trap ( Dr. Mitchell actually had a post on this once ) whereby they say: “We’re prosperous now. We can certainly afford some redistribution”, and step on the banana peel of socialism. Not all poor countries are growing faster, but the world average is still on a 4% trendline (with long term acceleration trend – i.e. the exponent itself is growing) and that sets the bar of where countries fall with respect to ascent or decline.
The striking evidence that convergence theory does not always apply is the very fact that there are countries with huge prosperity disparities in our world today. If convergence theory applied, as soon as a country got ahead, its growth rate would deterministically slow down, and the rest of the world would catch up. Most countries that are prosperous today are so exactly because they maintained growth rates — above the rest — even after they had already lurched forward. That is actually the growth story of the US itself, and of most other advanced economies.
One final point I’d like to stress is that as everything human irreversibly accelerates to velocities never seen since the dawn of humanity, these prosperity ranking reshufflings will be happening faster than ever, faster than most people realize. Gone are the times where countries retained prosperity leadership for centuries. The time when many of today’s prosperous countries are ridiculed on the world stage is closer than most people think, because growth rates worldwide (and thus growth rate divergence) is greater than ever before in human history – and accelerating to boot. In an old world where the average world growth was 0.2% and the fastest countries were growing five times faster at 1%, not much changes quickly. Prosperity leaders could maintain leadership for centuries before convergence. But today, in a world where rich countries are growing at 1% and fast growing countries are advancing 5 times faster at 5%, prosperity rankings will change fast, very fast, faster than most western world voter-lemmings realize. That is simply the natural arithmetic of exponents.
P.S. One technical correction that could be made to my thinking is that population growth must be subtracted from nominal growth rates. So I would qualify my comments by saying that when I talk about growth I mean nominal growth minus population growth.
Zorba,
I completely agree with your ideas about growth, but I think you’re a trifle pessimistic. A trifle, not a ton.
“Any nation with a growth rate below 4% is toast.”
First, starting point matters. If a rich country like the US grows at 3%, they will still look okay compared to most for many years. That is, a current lead and a decent growth rate can keep a country high in the ranking.
Second, if any rich country grows at a decent rate (say, 2.5 to 3 percent) they will not be ‘toast.’ They will still be rich, and getting richer. Yes, their lifestyles may fall behind some other countries. But it will still be a very good lifestyle and even better than today.
Third, convergence theory says that it’s difficult for low-income countries to raise incomes all the way to rich country levels. Easy to get to 2/3 or 3/4, but harder to get to 100% or higher. It can be done, of course. However, there’s no guarantee that all or even a majority of low-income countries will successfully do so.
These points are somewhat interlinked. Again, please don’t interpret these comments too negatively. I think you are very, very, very right, but maybe push it a trifle too far to make your point.
A 3% trendline growth was enough for America to surpass most nations and become most prosperous jurisdiction in the world — because for most of that time average trendline world growth was 2% or less.
That is no longer the case. Average world trendline growth is now around 4% and likely accelerating as we move further into the 21st century. So an American 3% growth trendline is still a trajectory of long term decline… …while about half the US population is excited to be turning America into Europe where the long term growth trendline is 1-2%.
This backdrop puts into perspective the herculean task of Americans maintaining their worldwide prosperity leadership in the next few decades — since, to paraphrase Dr Mitchell’s astute observation, “Remember, there is no substitute for above worldwide average growth if the goal is to be a prosperous successful nation”.
Put in simple quantitative words: Going forward, any nation with a growth rate below 4% (and likely rising) is toast.
Hence, “Stay mobile!”
PS. I think credit should be given not to Obama but to Republicans for resisting the expansion of coercive collectivism — but apparently only when they’re in the opposition minority… …as opposed to Democrats who are hopeless, always for ever more coercive collectivism and thus bigger government whether they’re control or in opposition.
Reblogged this on James' Ramblings.
How did the free money of the Obama years affect the growth? And how will the rise in prime rate affect the growth to come – I contend the free money helped Obama, and rise in rates will dampen Trump. I do not think the free money was a good thing, and despise the growth in DEBT by all involved
As a president can only “lobby” Congress to get a budget or legislation passed should we not look at Congress first and the President second?