Government, Business and Society

Study and comprehensive analysis of GDP of USA

Submitted To: Submitted By:

Dr Rashmi Ahuja Aishwarya Tiwari
173, Sec C
 US- GDP Analysis

The United States is the world’s largest economy. Despite this overpowering statement, the
growth with which the GDP of the nation is growing is dismal to say the least. During the
early 50’s and 60’s the average growth rate was somewhere around 4 percent, in the years
that followed it plummeted to about 3 percent. However, in the last decades, the average rate
has been below 2 percent and ever since the second quarter of 2000, the growth rate has is yet
to reach the 5 percent level.

Recently, President Donald Trump being as delusional as ever said that the U.S. economy is
“stronger than ever before”. But the bare facts portray that the workers are not lagging
behind in the Trump era. Official and reliable data released in recent times have shown
workers’ wages are stagnant, in fact reducing in real terms, since he took over.

Why GDP is an important indicator?

GDP growth is the bird-eye view of any economy, without the need of any other variables
one can gauge the status of a country, it works more or less like a company’s turnover with
which we can gauge its performance in the present environment. It holds a great significance
for macroeconomists who judge the economies over long periods to measure and compare the
GDP not only with other economies but with the same economy with its past history.
Nevertheless, it only presents half a relevant picture when looking at the economy as a whole,
hence its usefulness in measuring a country’s wellbeing and wholesome development is
limited. In present days economy, there is an emphasis on equitable distribution of
income. Given the history of all the economies, small or large most of the economic benefits
and perks goes to the top, the small number of well-off people make outrageously large
amounts of money, on the other hand the larger part of the population lives in annals of
poverty. The huge difference between standards of living among people points out to the
failure of GDP being a sound indicator.

Real Situation of US regarding GDP

Except the extremely wealthy, the wages they get determines an average American’s income
and standard of living. Here lies the sad part of US economy, the wage growth rate of US has
been average at best for the past four decades. Ever since the Great Recession of 2008, the
nominal wage growth rate has been disturbingly low, it crossed the mark of 2.5 percent
only couple of times after the end of 2017 —it grew minimally as compared to the inflation.

 Apprehensions about feeble GDP growth have prompted continuous outcries of pessimism
about the times to come. In various surveys all around the US and Europe about 70% of the
respondents confessed that they dread their progeny to be financially worse off than
themselves. The recurring memes about the fight between Babyboomers and Millennials
originates on the ground that our forefathers’ devastating financial and environmental
decisions has made the lives of their children dystopian.

Fluctuations in growth rate and its causes

Years GDP Growth (%) As the table 1.1 suggests there have been several leaps and
2000 4.10% falls in the GDP growth over the years. For instance, the
2001 1.00% growth bottomed out from 4.10 % to 1 % from 2000 to
2002 1.70% 2001 due to the infamous tech bubble burst.
2003 2.90%
2004 3.80%  As most bubbles work, there exists an alarming
2005 3.50% amount of speculation around certain stocks, with
2006 2.90% little or in most cases deteriorating worth to back
2007 1.90% these claims. During the dot-com bubble, the value
2008 -0.10% of equity markets grew dramatically in the bull
2009 -2.50% market. But it took little time for these internet-
2010 2.60% based firms to go bust, even the most prestigious
2011 1.60% firms like Oracle, Cisco had to lose about 80% of
2012 2.20% their value. Banks and brokerages gorged down all
2013 1.80% the excess liquidity that Fed created to fund the
2014 2.50% various start-ups dealing with internet.
2015 2.90%
2016 1.60% Some of the economic factors that we’ve studied till now
2017 2.40% and can be pointed out for the occurrence of bubble in the
2018 2.90% first place are:
Table 1.1

1. Cheap Money/ Excess Supply of Money: Due to the excess demand of money in
form of investment for the internet start-ups, and investors as well as government’s
overconfidence in them to excel in terms of growth credit was made easy. Venture
Capitalists funded a lot of firms in the hope of easy and large sums of profit.
2. Market Overconfidence: Certain amount of scepticism is always required in an
economy, over optimism always increases the chances of failure. Investors were eager
to find and put their money into the “next big thing” remotely related to internet. It
was an understanding that gains in terms of profits wouldn’t start rolling in early and
will take some time hence they waited patiently even though they were incurring
losses.
3. Speculation: Speculation is based on some calculated and mostly uncalculated risk.
Speculators strategizes in short periods to invest and earn profits in businesses they
think likely to outperform. This increased manifold during internet bubble, which then
ended in panic selling.
 GDP Growth (%)
5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
1995 2000 2005 2010 2015 2020
-1.00%

-2.00%

-3.00%

Fig. 1.1, GDP growth rate of past two decades

The GDP grew with slow but positive rate in the years following 2001 up until 2004, despite
grave tragedies like the twin tower attacks in 2001 which saw huge losses in commercial
space since they represented lion’s share. In 2002 the infamous War on Terror, which was
retaliatory move on the part of USA by the then President George Bush, on terror camps like
Al-Qaeda. Huge government spendings marked the years to come in military budget. Then
came the Iraq War in 2003 and 2004.

 In 2005 there was a decline in the growth rate, the major reasons that could be
responsible for the same, after a research of the internet articles and economic
journals turns out to be: Bankruptcy Act and the hurricane Katrina. National
Weather Service and BEA reports suggest that there was a 0.86 % of property
damage of GDP from the hurricane. The largest property damage of past decades and
even the upcoming ones. The consolidated damage to homes and vehicles along with
the damage to businesses weighed too much. Although the utility consumption didn’t
show much meaningful decline, still the effects were far reaching.

 Similarly, the Bankruptcy Abuse Prevention and Consumer Protection Act

(BAPCPA) that came in 2005 which was brought to decrease the number of personal
bankruptcy filings in turn by increasing the cost bankruptcy filings for an individual.

It doesn’t come as a surprise that the consumer debt service, which consists of mortgage
payments and personal debt as a percentage of income amplified to14 percent of income in
2005 from 11% in 1980 and the average filings per 1,000 persons increased from about 1.2 in
1980 to 6.9 in 2005. This whooping raise is owing to the Bankruptcy Act.
 1. Consumers in modern times are more prone to filing for bankruptcy when they’re hit
with negative income shocks which includes divorce, loss of job, and medical care.

2. Changes in the US judicial system has also made bankruptcy a feasible (rather
attractive) option for people to file by reducing the legal costs associated with it.

3. Better access to credit provisions for both the lower and middle-income strata of the
society who necessarily are not adequately educated in financial education is a major
factor.

4. Lastly, the erstwhile stigma associated with the bankruptcy and bankrupt entities no
longer exist.

 In the upcoming years, various factors worked together to consistently reduce the US
growth rate when Fed raised interest rates, to the bank crisis which finally culminated
into the ill-famed financial crisis caused by the housing market crash in 2008. This
asset bubble caused by the subprime loans, multiplied with extreme speculation and
inefficiency on part of everyone involved including the entire banking system,
government and the role played by shadow banking system was monumental. Some
of the major causes were:

1. Similar to tech bubble, the amount of credit and loans offered to the house
owners were so large, this included people with zilch financial know-how,
people with no or minimal mortgages, who couldn’t afford to repay the loans
and people with vicious agendas.

2. Bankers and Capitalists on their part sneakily bundled tremendously bad loans
among good loans in portfolios called Collateralized Debt Obligation (CDO)
and offered them to potential investors.

3. Rating agencies too in a race to out do their competitors turned a blind eye to
the decaying loans and credit scores and granted them all good ratings, putting
a question on the credibility of the loans and most importantly the agencies
themselves.

It is clearly visible in the table 1.1 that the growth rate went negative for two consecutive
years from 2008 to 2009. Despite the Stimulus Act in 2009 the rates remained negative. The
economy revived in 2010 with Dodd-Frank Wall Street Reform passed by then President
Barack Obama, those specific financial system were targeted in this act which were known to
cause the financial crisis including the notorious rating agencies. It accounted for
restructuring and liquidating the aforementioned entities.
 Annual GDP (in Mn  The economy received another setback in 2011 with
Years $) Japan earthquake and there are further fluctuations
2000 1,02,52,300 in the following years including the Fiscal Cliff in
2001 1,05,81,800 the year 2012. It alludes to the tax hike and spending
2002 1,09,36,400 cuts as a measure for deficit reduction. From cuts to
2003 1,14,58,200 budget in terms of healthcare to the unemployment
2004 1,22,13,700 compensation, all aggregated this cliff. As seen in the
2005 1,30,36,600 table 1.2 the annual GDP that year was 1,61,97,000
2006 1,38,14,600 million dollars.
2007 1,44,51,900  In the year 2013 the Cliff continued with budget
2008 1,47,12,800 sequestration, with reduction in spending authority. It
2009 1,44,48,900 was done to reduce the mounting deficit and decrease
2010 1,49,92,100 the spending capacity of consumers, an expectant
2011 1,55,42,600 decrease in MPC was expected. There were cuts in
2012 1,61,97,000 both defence and non-defence categories.
2013 1,67,84,900  In the years that followed several events occurred
2014 1,75,27,300 affecting the GDP that consists of end of Quantitative
2015 1,82,24,800 Easing, which refers to the discharge of money in the
2016 1,87,15,000 economy by the government to raise the consumer
2017 1,95,19,400 sentiment and spending.
2018 2,05,80,200
Table 1.2 Annual GDP of US

Chart Title
25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

0
1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
2010 2011 2012 2013 2014 2015 2016 2017 2018

It s also done as a measure to buy bonds,etc to fund the specific markets like housing in US’s
instance.
 In the year 2015 US entered into Trans-Pacific Partnership with hopes for increased
economic growth, trade and invested in abroad, creation of jobs inter alia. This was
the same year for Iran deal. There was the deciding Presidential race in 2016 and it
 can be clearly seen in both the tables that the GDP growth rate decreased once again
from 2.9% to 1.6% highlighting the importance of a new President and the tentative
policies implemented by him.

 The Trump Tax Act which came into being on December 22,2017: Tax Cuts and Jobs
Act. It not only slashed the income tax rates for individuals but also doubled the
standard deduction (the tax-free income on certain spendings), the rate drop was as
much as 37%. It impacted the economy in several ways:
1. It benefitted the high-income groups in many ways, since it was under the
act that those who earn more than 95% of the total population would be
receiving a raise of 2.2 % in after tax income.
2. It proved to be a lot less beneficial for large families as the higher credits for
the little ones and the old people proved to be insufficient, due to elimination
of personal exemptions.
3. Young generation would be more likely to get benefits by being eliminated
from the healthcare tax implemented by Obama, called Obamacare.
4. Self-employed and Entrepreneurs also benefitted because of the deduction
from their income tax.
 Deficit spending in 2018 and the ongoing Us-China trade war has put a strain on the
US GDP. It has not only impacted the twin economies but the global economy as a
whole. The tariff war has put a dent on US exports and the overall Balance of
Payments. The short-term results are already rolling out but the real effects are yet to
come out.
One of the things to note about the Trump administration that became a concern for the
economists is that the US economy is most unevenly distributed as ever. It
characteristically provides profits and boosts to big business but does nothing to raise
the wages of the backbone of an economy- the workers. The power asymmetry in US’
economy is a slow poison as well as a never-ending burden.
Also, the political implications of a Xenophobic, alt-right President is that the immigration
policies are tighter than ever, the brain drain from Asian economies which used to add to the
GDP of economy given the fact that highly skilled and educated workforce used to contribute
to the growth of America, can no longer do so. Historical trends clearly show that immigrants
are twice as much invested and interested to launch a start-up as the US residents, which
translates into creation of jobs and money in the economy, Unfortunately The “Make
America Great Again” policy doesn’t help in this scenario.