WASHINGTON, Nov. 20, 2015 — After the horrific attack on innocent people in Paris last week, the nation is consumed with waiting to see how our elected officials will respond. There are the questions of how to deal with ISIS and how to set immigration policy. Since the economy was the primary concern prior to the attacks, perhaps we should take a look at what is happening with the economy today.
The most important statistic is rate of growth of GDP. If the economy could grow at a 4 percent annual rate, instead the 2.2 percent annual rate we have experienced since the recession officially ended in the summer of 2009, most of our economic problems would be solved.
Higher growth would create a greater demand for workers, which would lead to more people being employed and higher wage rates. This reduces unemployment, reduces government spending on income maintenance programs, increases tax revenue without raising rates and, most important, provides greater opportunity.
This year it looks like growth will again be in the 2.2 percent range. Last quarter GDP grew at only a 1.5 percent rate. Most economists are forecasting a relatively weak Christmas buying season, noting that many retailers have excessive inventories from the poor back-to-school sales in late summer.
Making growth a bit more difficult, the Federal Reserve is likely to raise interest rates when it meets in mid-December. This meeting will come at a time when exports of U.S. goods are falling and imports of foreign goods are increasing. While the Fed is raising rates, the European Central Bank is likely to lower them since Europe has been teetering on recession all year.
Much of the rest of the world is also slowing. Japan and Canada are in recessions, and China’s growth has been about half of what it has been in the past. This reduces demand for products that are made in other countries and imported to Japan, Canada and China.
The higher interest rates in the U.S. coupled with lower interest rates in Europe will mean the U.S. dollar gets stronger relative to the euro. That makes U.S. goods more expensive for Europeans and their goods cheaper for us. That will have a negative impact on our growth.
A look at the jobs numbers verifies that the economy is stuck in a slow growth mode. The number of people being laid off is at low levels, so companies don’t appear to be contracting. On the other hand, the number of new jobs created is also low, so companies don’t appear to be expanding. It seems we are stuck in a stagnant position where economic growth is not much higher than population growth.
What will happen next year?
The consensus view is that economic growth will increase to a 3 percent rate. For the last three years, the consensus view was that next year’s growth will increase to 3 percent. The actual data showed a much lower growth rate. Similarly, there are enough headwinds that economic growth could again be in the 2.2 percent range.
Since 2016 is an election year, the candidates will offer plans to accelerate economic growth. The Democrats’ plan to stimulate growth will require more government spending and higher taxes, primarily for the highest income earners but eventually for the middle class too. They will also propose a hefty increase in the minimum wage and increased regulations to protect the environment.
The Republicans will offer a growth plan that is the opposite. They will suggest that tax rates be reduced for all Americans and the progressivity be reduced. They will plan to reduce government spending, reduce government regulation and keep the minimum wage at current levels.
The American public will use the ballot box to determine which policies make the most sense. In the meantime we are likely to experience the same stagnant economy that we have seen since the recession ended. The last year where the U.S. economy had moderately strong growth was 2006. It has been nearly a decade of poor economic growth. Most of the economic problems, and many of the social problems are a result of this stagnation.