The U.S. economy stands as a contrast to the European misery. This is particularly interesting given the fact that the United States has a president that came into office with the most radical statist agenda since the FDR presidency. In fact, President Obama still gets a lot of criticism from libertarians and conservatives for his ideological stance. Some of that criticism is no doubt well deserved, but there are areas where the president has earned more accolades than he gets.
In fact, if you listen to the common conservative wisdom about Obama, we have an economy that is on the verge of being socialized. That may very well be correct when it comes to regulatory incursions and irresponsible environmental policies, including the legislative monstrosity known as the Affordable Care Act. But beyond regulations and the occasional run-amok entitlement program, Obama’s economy has been reasonably good.
Last summer I expressed my appreciation of how well the American economy was doing given the circumstances – see the first, second and third parts – with particular emphasis on the permanent nature of the nation’s economic performance. In the third part I explained:
If the spending growth that drove the GDP number were of a more transitional nature, then I would agree with [the skeptics]. But … the numbers indicate strengthening confidence among consumers and entrepreneurs. It is very likely, therefore that this is a sustainable recovery. Not a perfect recovery, but a sustainable one. We should be happy for it. After all, things could be much worse. We could be Europe.
The most recent GDP numbers, covering all of 2014, point in the same direction. Let us go through them in four parts.
1. The composition of GDP
A healthy economy is heavily dominated by private-sector economic activity. Europe’s welfare states are dominated by foreign trade and government spending. Consequently, unemployment is almost twice as high as here in the United States, GDP is barely growing and the general economic outlook is dystopic.
As shown in Figure 1, the U.S. economy is better structured today than it was 15 years ago. In the fourth quarter of 2014 private consumption constituted 68.1 percent of the U.S. GDP (measured in 2009 chained dollars). That is up from 64.2 percent in Q1 1999. Under the first six years of the Obama presidency private consumption has averaged 68.1 percent of GDP. Compare that number to the 66.9-percent average under Bush Jr.
Another piece of good news is that gross fixed capital formation – business investments in street lingo – have returned to a healthy level of 15+ percent of GDP. At 17.2 percent in Q4 of 2014, investments are far higher than the 12.5-percent share they commanded five years earlier.
On this front the Obama years have not been quite as good as the preceding eight years under Bush: business investments under Bush averaged 17.7 percent of the economy, compared to 15.2 percent under Obama. That said, by global comparison American corporations are fairly confident in the future.
There are two more components of GDP, in both of which the Obama years have been better for the economy than the Bush years:
- Net exports, the balance between exports and imports, averaged -4.8 percent per year under Bush. The Obama years have thus far shown a better foreign trade balance, with a net exports only -2.9 percent per year. A smaller foreign trade deficit, in other words.
- Government consumption and investment has been smaller under Obama. This may come as a surprise to many, but since Obama took office federal, state and local spending has been, on average, 19.6 percent of the economy. The Bush years saw relatively more government spending, at 20.2 percent.
It is important to understand that these government-spending figures do not include cash entitlements and other financial outlays. To qualify as a GDP expenditure, a dollar must be spent either on compensating someone for work or on making an investment that, in turn, pays people for work. If I buy a share in Coca Cola it does not count toward GDP, but if Coca Cola builds a new production line it does count toward GDP.
With this qualification in mind, we can again conclude that Obama’s first six years have not done too much damage to the economy. On the contrary, the private sector continues to grow, government is showing some restraint and our perennial balance-of-payments deficit is actually in better shape than it has been in 15 years.
There is a lot more to be said about the current state of the U.S. economy. This is the first installment in a four-part series.