Whenever Republicans talk about not enough jobs being created or the recovery being slow and blame it on overregulation or Obama’s policies, it angers me.
A single fact can explain why the recovery has been slow and it has nothing to do with regulation, taxes or "uncertainty", and it is nothing that Romney would be able to fix. Summed up in one word: debt.
This is part of a three-part series that addresses three central issues that Romney is running on:
1. There is a debate over the role of government in the economy
2. The recovery has been slow
3. Obama has added to the national debt
The first part is here.
There's a trade off between growth and debt that’s obvious but not often acknowledged.
When a person takes out a loan to buy a car, a car needs to be built today. That means jobs for people to build cars and parts, and to sell cars. That means growth today in GDP. That means sales tax and payroll tax revenue for the government today. But without the loan (debt) it might not have been possible. The person might have had to save up another year or more.
When a person (or business for that matter) buys a house or anything on credit—same principle. New debt is created, and in exchange there’s economic growth today that might otherwise have taken later.
This kind of transaction is absolutely basic to our economy. It happens with almost every significant purchase that is made, across all sectors, all industries, all kinds of entities, large and small. It is like water in the human body—ubiqitous, an atomic building block of everything economic.
More debt = more growth.
But in this recovery we've seen exactly the opposite. More consumers are either defaulting or paying off older debts, and fewer are taking on new debts.
The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. (Source, Source)
In fact this change has been so dramatic that it’s overwhelmed the federal budget deficit. When you add together federal, state, and local debts with mortgage, credit card, student loan, car loan, business, and all other private debts across the economy, total debt across the economy is actually falling relative to GDP.
This single statistic explains why economic and job growth in this recovery has been slower than in past recoveries.
Fewer people borrowing, more people saving. That means less spending today, less demand today, less jobs today compared to other times.
Here I’ve made a chart comparing the change in the total debt to GDP ratios at the end of the past 10 recessions and the ratio 11 quarters later (because 11 quarters after the end of the last recession is the latest data available).
(Source, in combination with above)
Debt increased especially quickly after the end of the 2001 recession. With consumers and businesses debt-exhausted by 2008, not only was this the cause of the recession but it’s also the cause of the slow recovery. The economy is both working off debt and trying to recover from the recession at the same time, and the two goals are at cross-purposes. It's like an Olympian trying to train for Gold medal in gymnastics and the 100-meter dash at the same time. Of course they'll seem abnormally slow.
In other words, if the ratio of debt to GDP had changed at the average rate for postwawr recoveries, there would be more debt in the economy today equivalent to about 35% of GDP. This would be the equivalent to about $5 trillion of stimulus.
While the recovery has been slow under Obama, there’s a good reason, and a silver lining. Getting private sector debts under control is indispensible. Twice in my lifetime Republican Presidents have come into office on a supply-side deregulatory agenda, followed by a debt-fuelled expansion that looked like success at the time. This recovery is different. The private sector deleveraging will prevent what would be an even worse recession down the road, and it is a prerequisite for any real, lasting recovery.
In the next and final part of this, I will tackle what all of this means for the federal budget deficit.