Econ 101

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My wife had a spirited lunch conversation with four friends the other day. Three of the four insisted the US economy is still in the dumper and Obama’s stimulus plan has been an abject failure. I’m the economist in the family, so she asked me to sort it all out. Here goes.

In 2009, Obama inherited an economy in free fall. His first job was to stop the decline, which took most of that year. GDP was $13.9 trillion in 2009.

In 2013 it is projected to reach $16.6 trillion, up $2.7 trillion/year which is a compound growth rate of 4.5 percent per year.

Obama has had an excellent record on inflation, up only about 2.2 percent per year, so real growth is about 2.2-2.3 percent per year. We’ve had 16 straight quarters of real growth through June. Some say this is weak compared to other recoveries. I’d argue this was achieved despite severe headwinds from Europe and Asia, a Congress that has done all it can to squelch (sequester) stimulus by the Administration, and major cuts in spending by state and local governments. Consider also:

– The Dow Jones crashed in 2008 and bottomed out below 6700 in early 2009, putting savings and retirement accounts in the crapper. It has recovered 135 percent to an all-time high of 15,650. If you rode it out, you got back all your losses and are in the black. Trillions of dollars of wealth were restored.

– Healthcare reform is controversial, but it is 17 percent of the economy and it needed fixing. Obama pulled off the biggest reform to the system since Medicare in 1965. I’ll revisit this in future weeks.

– The auto industry went over the brink of disaster but is now surging. U.S. manufacturing in general is up.

– Housing collapsed in 2008 but it’s back. Home prices and home equity are rising. Commercial real estate is also up. The construction industry is growing.

– The economic drain of the Iraq War is over and the Afghan War is winding down.

– Energy markets are quiet, and reliance on foreign energy has fallen substantially.

– Inflation is low, commodity prices have fallen, interest rates remain very low.

– Business profit levels are strong and balance sheets (cash positions) are in excellent shape.

– State and local taxes are rising and deficits are coming down.

– Remember the $700 billion TARP? Most of it has already been repaid.

– The Federal deficit will fall from 10 percent of GDP in 2009 to under 5 percent this year (and under 3 percent by 2015).

– Obama has done a great job keeping the FED on his side.

Lots of good news here, so why are my wife’s friends so down on the economy? The short answer is they read the OC Register or watch FOX TV and get a very biased view of things. But there are those pesky unemployment figures to explain.

Beauty is often in the eye of the beholder. Did you know that unemployment under Ronald Reagan peaked at 10.8 percent in June of 1983, his third year in office, and the average UE rate for his full eight years was 7.5 percent. It finally got down to 5.4 percent in his eighth year. Under Obama, the UE rate peaked at 10 percent in October 2009 in his first year and was down to 7.4 percent last month. So what to believe?

Remember, employment was still heading south when Obama took office in 2009 and over four million jobs were lost that year. Since the bottom in 2009, the economy has added about five to six million jobs. So does Obama get credit for the additions since the bottom or just the net change?

Then there’s the private versus public sector issue. Obama points to a net two million new jobs in the private sector, but these are partially offset by cuts in government jobs (lots made by GOP lawmakers?).

My guess is historians will give Obama good marks for his economic stewardship, especially considering the hostile Congress and the problems overseas.

Now if I can get my wife’s friends to quit watching FOX.


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