The U.S. Economy in Three Greats

The overall job market remains very strong, though the drop in the unemployment rate may be ephemeral. However, one curiosity is that the recorded overall size of the workforce is down from two months ago.

The many examinations of the financial crisis a decade ago suggest this is also a good time to review what has happened since. The history of the last ten years can be broken conveniently into three distinct periods, each marked by its own “great.”

Naturally, recent history starts with the Great Recession, the deepest, most painful economic contraction since the Great Depression of nearly a century ago. Some manner of recession had seemingly become inevitable as widespread housing bubbles had developed, severe bubbles in some states. Indeed, severe housing bubbles were an industrial country-wide phenomena with few exceptions.

The patchwork of bubbles across states and countries underscore an important point – those jurisdictions with the weakest legal infrastructures saw the biggest bubbles. The housing bubble, however, didn’t cause the devastation of the Great Recession. Housing acted more as a detonator. While many industries added their own specific brand of fuel to the ensuing fire, the true source of the devastation lay in the financial sector where a combination of ineptitude, bad actors, and bad assumptions led to an intense maelstrom of contraction.

Under the Federal Reserve’s triage and subsequent intensive care the financial system recovered promptly, but the collateral damage to the broader economy was already done. Once the financial sector had fully regained its footing, the economy should with only a short lag have experienced a sharp recovery, much as a rubber band stretched far snaps back quickly. It didn’t. Instead, the Great Recession was followed by the second great: The Great Meandering.

On the Obama administration’s watch, economists and commentators wore out their thesauruses seeking alternatives to “weak” and “anemic.” Year after year a pickup was expected and failed to materialize. True, the economy was growing steadily but too slowly. As former Maryland Governor Martin O’Malley put it in the first Democratic debate in 2016, “Our poor are getting poorer and 70% of us are earning the same or less than we were 12 years ago.”

Why the poor performance? Because public policy matters. President Obama surely wanted a strong economy that would rapidly return to full employment and strong wage growth. But public policy is about choices, and when the choice was between more growth and more fill-in-the-blank, the blank usually won out. Especially when it came to imposing costly regulatory burdens on America’s businesses.

Individually, the many regulations were like throwing sand into the economy’s gears. But the whole was greater than the sum of the parts. And the whole was to create a regulatory environment hostile to prosperity. By 2016, the weight of this cumulative hostility caused the economy to slow from anemic to 1.6% growth.

President Trump’s first major economic policy initiative was to reverse course on regulations and create a welcoming environment for prosperity. It worked, contrary to the naysayers who’d tried in vain to convince the country anemic was the new normal. By 2017, growth was back above 2%. By the second quarter of 2018, growth was above 4%. The Atlanta Federal Reserve’s real-time estimate for the third quarter is nearly 4%.

Further, the greatest benefits of tax reform haven’t even been felt yet. This acceleration is due mostly to regulatory reforms and the shift to a more positive overall environment as reflected in soaring business confidence. Tax reform’s core benefits are in increasing business investment in the near term and raising productivity in the long term. These benefits take time to materialize as businesses respond to the vastly improved investment climate.

Some try to argue the economy’s current acceleration is due to a fiscal policy sugar buzz. This is nonsense. To be sure, the tax cut component of tax reform plus recent spending bills have pushed up the budget deficit. But even before these policy changes, the 2018 budget deficit left behind by the Obama administration exceeded a half trillion dollars. Are the naysayers really trying to assert that President Trump’s increment to the deficit is that much more sugary than Obama’s half trillion or Obama’s year-after-year trillions in deficit spending? One doubts they really want to suggest President Trump is that much sweeter than his predecessor.

Thus the history of the past decade is in three greats. The Great Recession was followed by the Great Meandering, which has now been followed by the Great Acceleration. The Great Acceleration won’t last forever. Coming as it does in the ninth year of the expansion, it is remarkable. But it’s no accident. Policy matters. And the acceleration will likely continue for some time as the full force of tax reform comes to bear.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.