Economic Expansions-A History
SEPTEMBER 7TH, 2022
ECONOMIC NEWS OF THE 3RD QUARTER, 2022
WHAT CAN WE LEARN FROM PAST ECONOMIC EXPANSIONS?
WHAT PATH WILL THE UNITED STATES TAKE?
STAPLES CONSULTING
On writing this newsletter, three rather famous quotes came to mind. “Those who cannot remember the past are condemned to repeat it” by George Santayana. “History doesn’t repeat itself, but it often rhymes” by Mark Twain. And, “The farther backward you can look, the farther forward you can see” by Winston Churchill.
We will be reviewing the four longest economic expansions in the United States during its modern era (post World War Two). The purpose of this review is to see what paths might be open to the United States in the near-term, and what might be the dangers that lie ahead for the country. We will be looking at the highest level of economic measures, to see how well the United States has performed and some of the pitfalls of those expansions, and a brief political analysis of factors that affected past and current economic conditions. These measures include the following; Growth in the Gross Domestic Product (GDP), Inflation Rate, Trade Balance of goods and services (Surplus or Deficit), Job Growth, Growth in the National Debt, and the Net International Investor Position (NIIP). We will be doing some comparing of these measures against each other to hopefully give some insight on the strengths and weaknesses of each of these expansions.??
The four expansions in chronological order are 1. February 1961 to December 1969 (106 months). 2. December 1982 to July 1990 (92 months). 3. March 1991 to March 2001 (120 months). And, 4. June 2009 to February 2020 (128 months).
ECONOMIC EXPANSIONS-AN INTERNATIONAL COMPARISON
The longest economic expansion in the United States modern history occurred from June 2009 to February 2020 (128 months); compared to other developed countries this is not much of a record. The two stand-out expansions are from Australia and the Netherlands. Australia holds the record for the longest continuous expansion among developed countries, from July 1991 to September 2020 (351 months, almost three times as long as the United States). The average annual growth rate of GDP was 3.2%. Australia’s long-term economic growth can be directly tied to two main factors. First, Australia’s relatively strong population growth compared to other developed countries is partly caused by sound immigration policies that have allowed large numbers of immigrants to move to Australia. Currently, 28.2% of the population is foreign-born, twice the percentage of the United States at 13.7%. Second, Australia’s growth is directly tied to the incredibly long growth in China's economy. As long as Australia could export badly needed commodities (wheat, wool, iron ore, coal, and natural gas) to China, its growth was assured. So, the 24 million Australians have lived very well by being the supplier of raw materials to 1.4 billion Chinese.
The Netherlands holds the record of the second longest continuously growing developed country, that is 26 years from 1982 to 2008, (312 months) at an average annual growth rate of 3%. This expansion gave us the economic term “Dutch disease,” which was first coined in 1977 by The Economist to describe the decline of the Netherlands’ manufacturing sector after the discovery of its large natural gas field in 1959.??
Then there is China, which is the longest continuously growing developing country (now a developed country), growing from at least 1976 to 2020 and probably beyond, that is 45 years (540 months). From 1979 to 2018, China’s annual real GDP averaged 9.5%. This has meant that on average China has been able to double the size of its economy every eight years. Because of the length and speed of its growth, China has become the world’s largest economy in 2014 (using the purchasing power parity method, PPP), manufacturer, merchandise trader, and holder of foreign exchange reserves. So having continuous growth in the economy does matter.
THE FIRST EXPANSION-February 1961 to December 1969 (106 months)
One of the most striking economic statistics of this period is during these nine years the United States had nothing but trade surpluses in goods and services. This was the last long expansion where United States goods were truly competitive in the world marketplace. Because of prior trade surpluses and the investment possibilities that the world’s largest economy offered, the United States was the largest creditor nation with a positive Net International Investor Position (NIIP), (The NIIP indicates if a nation is a creditor or debtor nation.) estimated at over a trillion dollars. The United States was the bank of the world during this period! This expansion lasted through the Kennedy, Johnson, and Nixon Administrations.
In terms of Annual Employment Growth it was 3.3% (from the Bureau of Labor Statistics), and the Annual Growth of Gross Domestic Product (GDP) was 4.9% (from the Bureau of Economic Analysis); this expansion was the strongest of the four long expansions in the United States modern economic history. The average annual inflation rate was 2.7% and we had the lowest unemployment rate during a 70 year span (from 1953-2022) of 3.4% in 1968. During the fiscal year of 1968-69, we also had a federal budget surplus, the last for nearly 30 years, the national debt stood at 354 billion at the end of the fiscal year of 1969 (June, 30th). The total number of jobs created was just over 11 million (when the United States population was about 200 million). This was a very strong expansion!
Two ratios that I like to look at (the Staples Combination) are how much national debt was used first to help create the total number of new jobs, and second to help create growth in the GDP. During this expansion the federal government increased the national debt by $69 billion and helped create 11 million new jobs. (Debt creation was from the Dept of the Treasury using the end of the fiscal period of July 1st, 1959 to June 30th, 1969.) So the federal government created new debt and spent $6,270 for each new job created. (Inflation adjusted 2022 dollars would be $58,990, starting from the year at the center of the expansion.) At the same time, the economy grew by $456 billion (Nominal GDP, using end-of-year figures); this means for every dollar of new debt created the federal government helped create $6.61 in new growth. Using a microeconomic example, if a small business wanted to expand by $100,000 they would have to spend $15,130 to do it. This would sound like a very wise investment.
The poverty rate dropped sharply during this period, from 22% in the late 1950s to under 12% by the early 1970s.
THE SECOND EXPANSION-December 1982 to July 1990 (92 months)?
This expansion led to two disturbing economic trends. First, we no longer had trade surpluses in goods and services; this expansion had 8 years of trade deficits (the trend started in 1976, but this expansion did nothing to turn it around). This and the large federal budget deficits led the United States to no longer be the largest creditor nation and we became a debtor nation. These trends continue on today where we are now the largest debtor nation in the world and the nation with the largest trade deficit. This expansion lasted through the Reagan and Bush (41) Administrations.
The Annual Employment Growth was 2.8% and the Annual Growth of GDP was 4.3%, slightly less than the first expansion we examined. The average annual inflation rate was 4.4%, and the unemployment rate dropped from a high of 10.8% to a low of 5.4% in 1989. The national debt exploded during this period, starting on October 1st, 1982 it was $1.14 trillion and ended on September 28th, 1990 at $3.23 trillion an increase of $2.09 trillion. Total number of jobs created between 1982 and 1990 was 19.3 million (when the United States population was 250 million).
Looking at the Staples Combination of ratios of jobs created and growth of GDP compared to growth in the national debt, during this expansion the federal government increased the national debt by $2.09 trillion and helped create 19.3 million new jobs. This means that for each new job created the government spent $108,290 in new debt. (Inflation adjusted 2022 dollars would be $282,440, over five times what was spent during the first expansion.) At the same time, the economy grew by $2.62 trillion, meaning that for every dollar of new debt created the federal government helped create $1.25 in new growth. Using my microeconomic example, if a small business wanted to expand by $100,000, they would have to spend $80,000 to do it. This expansion was much weaker than the first expansion that we looked at, relying much more on debt to grow the economy, but still getting a positive return on investment.
THIRD EXPANSION-March 1991 to March 2001 (120 months)
This expansion continued a string of trade deficits during the entire ten years, with the United States still needing to borrow large sums of money to pay for its annual budget deficits and these trade deficits. The United States became the largest creditor nation in the world, peaking at the end of the expansion around a negative NIIP of $1.5 trillion. The expansion started in the Bush (41) Administration, continued through the Clinton Administration and ended in the Bush (43) Administration. President Clinton is the only two-term president who never experienced a recession (at least in the modern era).?
In terms of the Annual Employment Growth it was 2.0%, and the Annual Growth of GDP was 3.6%; a trend of slower growth is appearing in each successive expansion. The average annual inflation rate was 2.8%, and the unemployment rate dropped from a high of 7.4% (1991) to a low of 3.9% (2001). The national debt continued to expand, starting on October 1st, 1991 it was $3.67 trillion and ended on September 30th, 2001 at $5.81 trillion, an increase of $2.14 trillion. The total number of jobs created between 1992 and 2001 was 19.2 million (when the United States population was 280 million).??
Taking the Staples Combination of ratios, job creation and growth of GDP compared to the growth in the national debt, we can begin to show how the different expansions performed. During this expansion the federal government increased the national debt by $2.14 trillion and helped create 19.2 million jobs; this means that for each new job created the government spent $111,460 in new debt. (Inflation adjusted 2022 dollars would be $210,470, an improvement over the last expansion, it cost $70,000 less in adjusted dollars to help create each new job.) At the same time the economy grew by $4.42 trillion, this means that for every dollar of new debt created the federal government helped create $2.07 in new growth. Using my microeconomic example, if a small business wanted to expand their business by $100,000, they would have to spend $48,310 to do it. These two ratios would indicate that the third expansion was stronger than the second, but weaker than the first expansion.?
THE FOURTH EXPANSION-June 2009 to February 2020 (128 months)
This expansion capped a string of 47 years of trade deficits, and has seen the explosion of budget deficits that has brought the United States to a negative NIIP of $14.7 trillion. We are now more indebted to other countries, than any other country in modern economic history (in dollar terms). The expansion started in the Obama Administration and ended during the Trump Administration.
In terms of the Annual Employment Growth it was 1.1%, and the growth of GDP was 2.3%. This continued the downward slope of less job creation and growth in GDP, after each successive expansion. The average annual inflation rate was 1.7%, and the unemployment rate dropped from a high of 9.9% (2009), to a low of 3.6% (2019). The United States had not seen this low of unemployment rate since the late 1960s. The national debt became a real embarrassment. Starting on October 1st, 2009 it was $11.9 trillion and by September 30th, 2020 it was $21 trillion, an increase of $9.1 trillion. The total number of jobs created between 2009 to 2020 was 18.5 million (when the United States population was 330 million).
Taking the Staples Combination of ratios, job creation and growth of GDP compared to the growth of national debt, during this expansion the federal government increased the national debt by $9.1 trillion and helped create 18.5 million jobs; this means that for each new job created the government spent $491,890 in new debt. (Inflation adjusted 2022 dollars would be $614,870, nearly three times the previous expansion and over ten times the cost of the first expansion.) At the same time, the economy grew by $7 trillion; this means for every dollar of new debt created the federal government helped create 77 cents in new growth. Using my microeconomic example, if a small business wanted to expand by $100,000 they would have to spend $130,040 to do it. This is a sign of a failing business and one that needs major restructuring to survive!
COMPARING THE FOUR EXPANSIONS
Annual Annual
Employment GDP Inflation
Growth Growth Rate
First Expansion 3.3% 4.9% 2.7%
The 1960s
Second Expansion 2.8% 4.3% 4.4%
The 1980s
Third Expansion 2.0% 3.6% 2.8%
The 1990s
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Fourth Expansion 1.1% 2.3% 1.7%
The 2010s
STAPLES COMBINATION RATIOS
Single Job Creation Cost of $100,000
Cost (in 2022 $) in GDP Growth
First Expansion $58,990 $15,130
The 1960s
Second Expansion $282,440 $80,000
The 1980s
Third Expansion $210,470 $48,310
The 1990s
Fourth Expansion $614,870 $130,040
The 2010s
COMPARING THE EXPANSIONS
Reviewing the first chart, anyone can see that we have a very troubling trend in the United States economy. In every successive expansion, we have experienced slower growth in the creation of jobs and in the GDP. This decline has been both consistent and long-term with no solution coming forward to turn this trend around. Looking at the second chart, we have a terrible fact that the last expansion was completely driven by debt creation by the federal government; and that the difference in the cost of job creation between the first expansion and the last expansion was over ten times greater. This should be warning us that the United States economy is in terrible trouble.
THAT’S THE PROBLEM-SOME POSSIBLE SOLUTIONS
The United States needs to reduce the cost of doing business in America to secure its economic future. The problem with this statement is that it oversimplifies and confuses people into believing that this is going to be easy…it’s not. Often when people hear about reducing cost to business, they immediately think “tax cuts.” I’m not suggesting this at all, in fact we might be needing to talk about tax increases instead.
Below is a short list of areas that the United States needs to change to become more competitive in the world marketplace.
OVERPRICED HEALTHCARE SYSTEM
Anyone that seriously takes a non-confirmation bias look at the United States healthcare system would see an inefficient and overly costly system. A conservative estimate of the waste within the system is $1.2 trillion a year. If the United States had a healthcare system that met the average cost of other world competitors among developed countries, what Americans currently pay into the government to cover the cost for Medicare, Medicaid, and the Veterans Administration healthcare system would cover every American and business and individual with no added expense. This would lower the cost for every business and make United States companies more globally competitive.
UNDER-PERFORMING AND OVERLY EXPENSIVE EDUCATION SYSTEM
By any international comparison with other developed countries, the United States has an under-performing K-12 education system. Our overly fragmented school systems have not produced the innovation that many believe should have occurred. Change needs to come from the top-down, because the approach from the bottom-up has not worked. Every three years PISA has come out with its review of education systems around the world and outlined how the best in the world achieve their goals, and every time the United States does not change their own education system to match successful ones. Even in the United States, there are examples of excellent school systems (such as the State of Massachusetts), but other states seem not to follow their success.?
Higher education needs major reform; we have excellent colleges and universities, but they are too expensive. Over the past 40 years, the cost of a college education has risen at twice the average inflation rate. The federal and state governments continue to support colleges/universities without demanding they lower their cost. Two-thirds of the developing countries graduates leave college with no debt or under $2,000 in debt; only the United States has student loan debt of $1.75 trillion. Even with the recent loan forgiveness program by the federal government will not fundamentally change the current system to lower its costs.
IMMIGRATION REFORM IS BADLY NEEDED
The United States desperately needs immigration reform; it could easily take in 3.5 million immigrants or refugees each year to help solve its labor and human capital needs, and help solve its future demographic problems. A nation that is as large as the United States could easily absorb this number of people and make economic growth possible without stoking inflation.
CRIMINAL CORRECTION REFORM
Looking at the United States’ current criminal correction system and comparing it to its economic rivals the only thing anyone could say is it's a dismal failure. Looking at France, the French system has only about 10% of the prison population (adjusting for population differences), but has about the same level of criminal activity. The United States could easily reduce its prison population by 1.5 million residents, and the number of correctional officers could be lowered by 300,000. These two groups make up one of the least productive parts of the current labor force. With major reforms moving to rehabilitation from warehousing this could lower costs and raise the labor force. Currently, it's cheaper to send someone to an overpriced college, than it is to warehouse someone in the current prison system in the United States.
CONSOLIDATION OF POLITICAL BOUNDARIES
The political boundaries that exist in the United States were first formed over two hundred years ago and haven’t changed much since. The United States could eliminate hundreds of thousands of local government worker positions. Economics of Scale is not to be found in local governments anywhere. With the use of the internet, companies across America have discovered that remote work and internet services can provide goods and services much cheaper than just 30 years ago. Local governments seem to be stuck in the 1950s mentality and resist all changes that might make for a more efficient system. This could also get rid of large numbers of petty politicians and administrators.
CENTRAL BANKS CAN’T LEAD, ONLY POLITICIANS CAN
Central Banks around the world have done what they could do over the past decades to keep the world economy functioning. The United States Federal Reserve has done a good job of trying to keep to their dual mandate of having low inflation and unemployment. If we look at the list above we need to realize that none of these areas requiring action fall under the Federal Reserve’s purview.?
The political situation in the United States has gotten worse over the last 25 years, with very little being passed in Congress that has reduced the cost of doing business in America. The reality is that 25% of voters support the Republican party and 25% support the Democratic party, with 50% not caring enough to vote; which means if any party wins an election they don’t have the support of the majority of citizens. The amount of trust between the members of the two parties has only gotten worse and has divided the nation into inaction. The recent rise of neo-nationalism in one of the major parties of the United States might lead to its withdrawal from the world stage, following the pattern of decline of the British Empire in the 1950s and the Soviet Empire of the 1990s. The other major party is split between the moderate and progressive elements, which doesn’t give a clear message of where they would lead the United States. Neither party has shown an interest in taking on their own special interest groups.?
If either party attempted to change these areas for the better; they would be met not only by resistance from the other party, and by special interest groups and rent seekers (who want to preserve their special status), but by members of their own party for ideological reasons. That party would lose the next election and no longer be in power. We have repeatedly seen that politicians are often punished by the voters in America for doing the right thing.
Many economists have to leave their ivory tower sanctuaries and begin talking to the people on the street more! Often we inform only those within our own tight groups of experts who speak our language! We need to do a better job of communicating to the average citizen and voter the challenges ahead and the possible path forward! We need to provide backing for those politicians who have the moral courage to do the right thing, risking their own jobs to make the needed changes to the United States economy.
Respectfully Submitted
Christian M. Staples MBA
Member of the American Economic Association
756 Worden Avenue
Kalamazoo, MI 49048??
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