WASHINGTON: The US economy added a very impressive 225,000 jobs in January 2020. This figure far exceeded expectations and points to a strong start for 2020. While the consensus view of economists is that the economy will slow down this year, after finishing 2019 at 2.3% GDP growth, recent events indicate that GDP growth could top 3% this year, something not seen since 2005.
After the recession of 2008/2009, the prior administration failed to set economic growth as the primary policy goal. Instead, Obama concentrated on curing perceived injustices, which placed burdens on economic growth. Instead of the economy rebounding sharply in 2010 and beyond, growth was tepid.
From 2010 to 2013 economic growth averaged about 2%, even with the massive increases in the money supply, known as quantitative easing and with massive increases in government spending. Never in history has both Monetary and Fiscal Policy been so expansive. Yet the economy didn’t increase growth significantly. Why?
Causes behind Obama Administration Slow Growth
The reason for the slow growth was the Obama administration’s curing perceived injustices policy. For instance, Obama believed that it was an injustice that all Americans did not have health care coverage. He passed the Affordable Care Act (ACA) which increased the percentage of Americans with health insurance from 85% to 91%. The ACA helped 6% of the population, which is about 20 million Americans.
Because the ACA required employers to provide health insurance for all employees or pay a $3,000 fine, the cost of labor to business increased. Additionally, the ACA had 21 tax increases on the middle class. These actions slow economic growth.
Obama also increased federal government regulations. There were nearly 4000 new EPA regulations alone and thousands more regulations in Obama’s last year in office. These regulations tend to slow economic growth.
Obama also created huge deficits in the government budget by the massively increasing government spending. In 2008 prior to Obama’s election, the annual deficit was $455 billion. In 2009, Obama’s first year as president, his policies increased the deficit to $1.4 trillion. The annual deficit stayed about $1 trillion until 2013.
Obama did not want banks to grant loans to Americans who freely applied for the loans but really could not afford them. So the Dodd/Frank bill was passed to eliminate this “predatory lending.” The problem was that the law reduced all lending which essentially minimized the effect of the expansionary Monetary Policy. This tended to slow economic growth.
Although growth finally did increase to 2.9% by 2015, growth slowed to 1.6% in 2016. A continuation of Obama’s policies would likely have led to a recession in 2017.
In 2017, President Trump changed the Obama economy
Trump reduced counterproductive and burdensome regulations. Annual growth increased from 1.6% in 2016 to 2.4% in 2017. Then Trump cut taxes effective in 2018 and growth increased to 2.9%.
Growth would likely have been much higher except the Federal Reserve (FED) increased interest rates eight times from the end of 2016 to the end of 2018. They also reversed the quantitative easing and shrunk the money supply by nearly half a trillion dollars in 2019. This tended to slow economic growth.
In 2019 the restrictive monetary policy slowed growth to 2.3%. Fortunately, the FED realized its error and cut interest rates three times in 2019. The effects of that will be felt in 2020. January’s job numbers are beginning to show the economy is poised for higher growth this year.
When the economy is growing at a healthy rate, consumers and business become more confident.
That means consumer spending, which accounts for about 70% of GDP will continue to be strong. When consumers feel confident they increase spending and take on more debt. In December 2019 consumer credit increased bringing the total to more than $4 trillion, a record.
Business investment has been sluggish for the last year or so, mostly because of uncertainty. But now that major trade deals have been approved and the impeachment nonsense is over, business will feel more confident and will increase investment. This will increase economic growth.
The foreign sector will be less of a drag this year since the new trade deals mean that our exports will increase and our imports will fall. This adds to economic growth.
Perhaps growth will exceed 3% this year. January’s job numbers are indicating just that.