Making the Grade

By Dr. Peter Linneman

Dr. Peter Linneman is a principal & founder of Linneman Associates and professor emeritus at the Wharton School of Business, University of Pennsylvania.

President Obama entered office with a congressional super majority and a seeming mandate to remake the U.S. economic framework. The model for this remake was that of the social democracies of France, Germany, Japan and Scandinavia, where “market forces are tamed by politicians” and resource redistribution is more important than economic growth. What the incoming Obama administration failed to grasp was that the French and Japanese economies were in shambles as a result of social democratic policies crushing supply-side growth, while both Germany and the Scandinavian countries had already introduced radical free-market reforms in response to decades of anemic economic growth. During the Obama administration, we saw a prolonged period of economic policy uncertainty, federal budget deficits unlike any the U.S. has ever experienced in peacetime, the complete reorganization of the U.S. healthcare system, the prolonged extension of unemployment benefits, reduced de facto worker disability standards, a sweeping change in regulation of the financial system, the introduction of a new consumer protection agency, and an explosion of regulations on every front (largely delivered by agency fiat and executive orders after the first two years in office).

So what does the U.S. economy have to show for this heightened policy activity? Certainly not a reduction in income disparity. And while the U.S. stock market (as measured by the Dow Jones Industrial Average) was up by 90.5 percent on Election Day 2016 versus the day President Obama was elected, this was primarily attributable to the typical cyclical normalization of multiples and profits.

Most telling is that although real GDP is up 12.8 percent from the third quarter of 2008, it remains $3.1 trillion below its long-term trend. This 14.3 percent deviation, which has developed over the past eight years, amounts to about $210,000 per capita in cumulative lost GDP over this period. This is the additional GDP we would have had if the U.S. had simply cyclically regained its lost real GDP, as has been the case with all past recoveries. But instead of the usual robust recovery following an extraordinarily deep recession, real GDP growth over this recovery has been a tepid 2.1 percent, or 80 basis points below its long-term trend.

Labor’s slow recovery

Meanwhile, the recovery of the U.S. labor market has been long but slow. The unemployment rate of 4.8 percent today is good, but partially attributable to an abnormally low labor force participation rate, as millions of Americans have not returned to the labor force, choosing instead to collect disability or unemployment payments.

The single-family housing market, a prime engine of the U.S. economy and middle-class employment, remains a shadow of itself after seven years of recovery. It has a cumulative underproduction of 2.6 million units, based on a 25-year historical norm of 1.1 million housing units per year. This is almost completely attributable to an unprecedented policy by the Fed (whose members are appointed by the President) of imposing absurdly below-market interest rates for seven years. These low rates have sapped the ability of short-term safe savers to generate the income necessary to fund down payments for home purchases. These interventionist policies reflect a core belief of social democracies that “government knows better than markets.”

In short, while there was substantial growth during the Obama years, it was attributable to the normal recovery that always occurs as the U.S. economy emerges from an economic downturn. After a full eight years of the Obama administration’s social democratic economic policies, the U.S. has achieved the same slow economic growth as the social democratic economies of Europe and Japan. While slow growth is better than no growth, it has exacted a huge human toll on a per-capita basis without any reduction of inequality.

Those who praise radical economic interventions such as the Troubled Asset Relief Program (TARP) and the bailout of the auto companies (neither of which we believe helped the economy, but are widely viewed as economic saviors) fail to remember that these were Bush administration policies.

All in all, this U.S. university professor gives a gentleman’s C to the Obama administration’s economic policies (far better than that of the Bush years). And this reflects today’s “no one fails” approach to grading. Any eight-year period where real GDP and employment fell so far behind long-term U.S. patterns cannot be awarded a higher grade.

Dr. Peter Linneman is a principal & founder of Linneman Associates and professor emeritus at the Wharton School of Business, University of Pennsylvania. www.linnemanassociates.com. Follow him on Twitter: @P_Linneman

Originally appearing in the May 2017 issue of CPE.