WASHINGTON, January 31, 2015 — For the past month, President Obama and other administration officials have claimed that the economy is recovering and we have finally turned the page on slow growth.
The recently released estimate for fourth quarter GDP growth, however, tells a different story.
Since the recovery from the 2007-2009 recession officially began in July 2009, GDP growth has averaged just above 2 percent annually. This figure barely exceeds population growth. The result is that this recovery is the worst since the great depression in the 1930’s.
The contrast with the recovery which followed the more severe recession in 1981 is strong. In the four years following that recession, GDP grew at more than 4 percent annually.
Since 2010, government economists have been forecasting that economic growth would rise to at least 3 percent . Each year, we have fallen short. There was some hope for 2014, but with the latest figures for the fourth quarter, growth for the year will be 2.4 percent, another disappointment.
Although 2014 started off poorly with the economy actually contracting, growth from April to September averaged about 4 ½ percent. This led the President to conclude that slow growth was over and we had turned the page toward prosperity. Unfortunately we haven’t turned the page, and 2015 will likely bring slow growth again.
Extremely low gas prices for the past couple of months should have propelled the economy. Consumer spending increased as a result of the extra disposable income consumers had when gas prices began fall. Businesses apparently don’t see this increased consumption as long lasting. They expanded little at the end of 2014 and will probably see little reason to expand in 2015.
The reason is that the current business environment makes expansion difficult, especially for the small businesses that create the majority of new jobs. The difficulty comes, in part, from added regulations imposed by the Obama Administration. Making matters worse, the employer mandate from the Affordable Care Acts kicks in for many small businesses this year and kicks in next year for the remainder. This raises the cost of hiring workers.
Taxes were raised for successful business people in 2012 when the Bush tax cuts were made permanent for all Americans except the most successful. The high tax rates, coupled with increased costs due to the employer mandate and with a highly regulated business environment all serve to slow growth.
The new jobs that have been created include a disproportionately large number of part-time and low paying positions. The surge in part-time workers is also a result of the Affordable Care Act. Because the employer mandate requires that businesses offer health insurance to every full-time employee, companies have been replacing full time workers with part-time workers. This is especially true for low-skilled workers.
A company that would have hired seven workers who each work 40 hours per week might now hire 10 workers who put in 28 hours per week. The company still gets the 280 man-hours of work, but does not have to provide health insurance or pay a fine for not providing it. The increase in the number of employed people causes the unemployment rate to fall, but doesn’t lead to economic growth since incomes are stagnant.
With a new Congress in session and with the President promising to help the middle class, perhaps federal policy makers will start to focus on really growing the economy. We need to put the rhetoric and back patting aside and establish an economy where businesses have the resources to grow and where Americans see opportunity. In the current environment, neither is present.