Munich Personal RePEc Archive

The myth of economic growth in the United States

De Koning, Kees (2016): The myth of economic growth in the United States.

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Many economic philosophies –whether subscribed to by left or right wing politicians or economists- have as their shared aim to promote economic growth rates. Such growth in output is seen as the solution to many problems, including reducing unemployment and increasing household income levels. A key area of contention between right and left is whether such growth should be achieved primarily by actions taken in the private sector or those organized by a government.

Main drivers to support economic growth include the option of additional fiscal spending and/or the use of monetary policy in which a central bank’s interest rate plays a key role. After 2008, central banks introduced quantitative easing in the policy mix.

Output growth reflects a short-term positive change in the volume of goods and services produced. Output growth does not reflect the changes taking place in individual household disposable income levels, their debt obligations or their employment status. Output growth does neither reflect government nor corporate debt levels nor does it reflect the savings built up in pension funds and the lending based on such savings.

In the U.S. over the period 1997-2007 total household mortgage debt as a percentage of nominal GDP grew from 43.6% in 1997 to 73.3% by 2007: a debt explosion relative to income growth levels.

The Federal Reserve took no action to slow down this debt accumulation when it was happening. In the aftermath, due to its nature, the Federal Reserve was not equipped to help individual households with their subsequent liquidity crisis. It could do nothing for the 23.250 million households who were confronted with foreclosure proceedings over the period 2005-2014. Lowering interest rates does not solve outstanding household debt problems and neither does buying up government bonds or mortgage-backed securities.

The commercial banking sector was no help either. Their overriding profit objective forced them to claim back outstanding mortgage debt as quickly as possible, irrespective of the economic consequences.

The U.S. government saw its revenues drop by $3 trillion over the period 2007-2015 as a consequence of the household debt crisis. It also borrowed and spent another $7 trillion to help restore economic growth over this period. The result was a lack-luster period of economic growth.

Economic evidence supports the view that households should have been helped in overcoming their liquidity squeeze. A lender of last resort for individual households is needed. Once operational, the myth of economic growth will turn into reality.

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