GDP: Policy Matters to Growth

By at 26 August, 2021, 12:53 pm

by Raymond J. Keating –

Little changed with the second estimate of second quarter GDP (gross domestic product) released on August 26 by the U.S. Bureau of Economic Analysis. Compared to the initial (or “advanced”) estimate released in late July, real GDP growth was revised up, from 6.5 percent to 6.6 percent.

Policy Decisions Determine Growth

As the Biden administration and Congress hotly debate some big policy issues, policymakers must keep in mind that policy decisions very much matter when it comes to the economy. Real GDP (or “the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production,” as noted by the BEA, adjusted for inflation) will be affected negatively if tax increases, more regulation, protectionist trade policies, and expanded government spending are imposed.

Such policies impact the incentives and ability to undertake the activities that drive increased production of goods and services, that is, entrepreneurship, private investment, work, productivity and innovation.

Of course, the economy also is working to recover from and regain lost growth due to the pandemic. But it pays to ponder that real GDP growth was less-than-robust for the 13 years prior to the pandemic hitting in early 2020.

A recession that started in late 2007 turned into the Great Recession. And the subsequent recovery/expansion period, while lengthy, badly under-performed in terms of real growth rates.

Consider that real annual GDP growth averaged 3.4 percent during the post-WWII era to 2006 (specifically, from 1947 to 2006). But from 2007 to 2019, real GDP growth averaged half of that, i.e., 1.7 percent. If we factor out the Great Recession, the recovery/expansion period of 2010 to 2019 experienced an average annual growth rate of only 2.3 percent. That’s miserable.

Source: Federal Reserve Bank of St., Louis, FRED

Indeed, as noted in the above chart, the last time the U.S. experienced an annual real growth rate of at least 3.0 percent was in 2005 (3.5 percent).

More Costs and Uncertainty for Business = Underperforming Economy  

Over these past 13 years, policy has generally been turned in an anti-growth direction, including tax increases and hyper-regulation during the Obama years; some tax and regulatory relief combined with other regulatory increases and a dramatic shift to protectionist trade policies during the Trump years; and now, the Biden agenda encompasses massive tax and regulatory increases, and little interest in unwinding the Trump protectionism.

Throughout, government spending increased markedly, and loose monetary policy without precedent from the Federal Reserve created additional uncertainty. That is a recipe for an under-performing economy, at best, and that’s exactly what we have experienced.

If we would like a return to robust economic growth, then the U.S. will need to implement a very different policy agenda, namely focused on tax and regulatory relief, free trade, government spending restraint, and sound money.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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