Measures of Economic Strength

In process Jan 2011
 

Various methods are used to measure the strength of the economy. Here we look at a few.

The GDP is the most used method of measuring the economy. When the GDP rises, we are told the economy is "strong" or "in recovery." Recently, various groups have postulated that the tax cuts of 2001, like the tax cuts of 1981, strengthened the economy. The same groups also claim that the taxes of the 1990s suppressed the economy. We will look at the data to test these claims.

Note: The 2007 version of this page ended with the quote, "So the information above leads to a quandary? Is the GDP growth since 2001 real? If so, where is the money going? It's not going to improve the standard of living for over half of us. It's not pulling people out of poverty. It's not reducing the deficit. Either the money is disappearing into a hole somewhere or the growth is not real!"

In contrast, as late as September 2008 some politicians were insisting that the fundamentals of the economy were strong. The purpose of these pages is to show that by looking at the numbers we can tell what is not true.

 
Here we look at the last 30 years. The graphs show the annual growth rate measured each quarter. We mark some of the long term trends with orange arrows. The second graph adds, in green, the normalized employment growth rate for comparison.

First we note, the two strongest persistent growth spells occurred from 1975-1979, and 1996-2000. Neither of these eras were characterized by a tax cut. In fact, the second was a time of a "tax on the rich."

Next look at the two years of tax cuts. A tax cut went into effect in the beginning of 1982. The economy continued downward until 1983 when both interest rates, and oil costs dropped. Tax cuts went into effect in 2001. The economy remained sluggish until 2003. And even this "surge" averaged lower than the era of Clinton's "tax on the rich."

So, both tax cuts were followed by sluggish economies. The tax on the rich was followed by a strong economy. This seems to negate the economy-stimulating tax-cut hypothesis. (Note: this does not mean the author supports high taxes. Simply, we're checking to see if we can validate the hypothesis. Also, we are surprised to see that the downward trend under Bush Sr started long before the Gulf War.)

Real Economy: Opportunity and Stability for the populace

We added the growth in employment to the graph above recognizing that regardless of the GDP, the economy is only strong if its creating opportunities and security for the citizens. We measure GDP because we believe that if there is more wealth total, there will be more for the citizens. But this is not guaranteed.

Since the tax cut of 2001, real employment growth never really resumed. So the oxymoron "jobless recovery" was coined to create the illusion that growth without opportunity is good.

But do we always need more jobs? Did the growth provide wealth enough to go around, even without new jobs? We can look at both incomes and the poverty rates for that.
Except for the formation of a bubble, incomes dropped in the 8 years following the 2001 tax cut. The highest GDP growth occurred in 2003. However, in 2003 the bottom half of wager earners suffered a drop in income. So the "growth" was not reaching the populace. Not surprisingly, with incomes dropping, poverty was increasing. Again, the "growth" was not reaching those who need it most. Ironically, poverty was dropping in the 8 years before the tax cuts, but increasing after!
The Deficit?
We already know better, but we might ask is the increase being used to pay off old debts? No. The federal deficit is growing at the fastest rate since WWII. In fact the deficit is growing at about $650/citizen each year.
A Quandary: Where is the money going?
So the information above leads to a quandary? Is the GDP growth since 2001 real? If so, where is the money going? It's not going to improve the standard of living for over half of us. It's not pulling people out of poverty. It's not reducing the deficit. Either the money is disappearing into a hole somewhere or the growth is not real!
Data Sources
GDP
Employment
Incomes
Poverty
Deficit
oil 1970s
1980s
gulf war