January 28, 2005

January 28, 2005 | WebMemo on Economy

The Big Picture on GDP Growth

How sure are you that the new economy was a mirage? With the release of fourth quarter GDP data for 2004 today, there may be a lot of commentary that the economy is not doing as well as expected. A lot of radio ga-ga about trade deficits and falling dollars. Don't believe it.

 

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Using annual figures, real GDP increased 4.4 percent in 2004 - the fastest since a 4.5 percent increase in 1999. Measuring from 4th quarter to 4th quarter, U.S. GDP has increased for 22 straight years. The chart above shows only three years of contraction since 1973.

Gross output contracted in 1974, 1980, and 1982. There have been negative quarters in the last two decades, to be sure, but it seems clear that those represented restructuring more than classic hard-biting recessions. It is a mistake to focus on the latest branch on the closest tree while missing the historical forest, as the predictable and pointless political nitpickers do when they describe today's GDP release as a "disappointment." Gross U.S. output since 1982 has more than doubled, growing by 111 percent.

There are two major sea changes in between the current long boom and the chaotic 1970s.

Over the last 20 years, inflation has been effectively tamed. Economists in central banks around the world understand inflation and money supply so much better than before Paul Volcker proved the vitality of credibility in monetary policy. Keeping inflation low allowed the free market to achieve real productivity growth.

Second, America has been a low-tax, pro-business zone ever since Ronald Reagan slashed marginal tax rates in 1981, and then again in 1986, from a high of 70 percent to 28.5 percent. But weren't Bush (41) and Clinton big tax-raisers? In short, no. They raised rates, but never above 40 percent. The new economy grows in Reagan's soil.

However, the real lesson over the long-view is that America's economy has been growing relentlessly for decades, even going back to 1940. Trade deficits have not slowed the American juggernaut, and arguably have helped boost aggregate supply. The U.S. growth dynamo is real, and government has very little to do with the phenomenon, aside from its beneficial role in staying out of the way.

Tim Kane, Ph.D., is Research Fellow in the Center for Data Analysis at The Heritage Foundation.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)

Related Issues: Economy