Paul Ormerod: Springtime for America
Is America heading for a boom? Real GDP has risen for 13 successive quarters and now stands
3 per cent above its peak level. A
net total of 4.8 million jobs has been created over the past three years, with
a fall of half a million in the public sector being massively outweighed by the
5.3 million rise in the private.
But welcome and sustained though the recovery is, it hardly
constitutes a boom. And it
certainly does not when compared with the growth rates seen in the recovery
from the last major financial crisis in the 1930s. The slump was of course much worse, with output falling in
every single year during 1930-33.
The rebound was spectacular.
GDP rose by no less the 43 per cent between 1933 and 1937.
The driver of the recovery in the 1930s was the private
corporate sector, contrary to much popular myth about the New Deal and fiscal
expansion. Overall for America,
1933 was still a recession year.
But this was the year in which corporate sentiment changed. Sharp cut backs in investment meant
that in 1932, companies were directly responsible for a reduction in GDP of 5
percentage points. This changed
dramatically in 1933, with increases in investment contributing 2 per cent
points to GDP. Positive feedbacks
meant that the economy then surged.
Optimism rose, so investment rose even faster. This lead to increases in employment, so consumers both were
and felt better off.
The same potential exists for the US in 2013. One big difference with the Great
Depression of the 1930s is that, this time round, companies took much more
effective action, much more quickly, to protect their balance sheets. In the 1930s, undistributed profits were
negative for four successive years.
Since the financial crisis of 2008/09, corporate profits in the US have
risen sharply.
Over the five years from 2003 to 2007, inclusive, the annual
average value of undistributed corporate profits in America was some $480
billion, or about 3 per cent of GDP.
Over the 2009-2012 period, the average has been $800 billion, and it is
currently running at an annual rate of $1000 billion.
The myth again persists that it is the public sector which is
responsible for the American recovery, in contrast to the wicked austerity
programme in the UK. But in the
past three years, government current spending has made a marginally negative contribution to GDP growth.
Compared to the years before the crash, US companies are
building up cash balances on a massive scale. The increase is of the order of 2 per cent of GDP each year
from 2009 onwards, and in 2012 over 3 per cent. Once corporate sentiment turns, investment will boom, many
more jobs will be created, and consumer spending will rise even more rapidly as
a result.
Once corporate sentiment in America decides that the bad
times are well and truly over, we can easily see GDP growth rates of 5 per cent
or more.
Paul
Ormerod is an economist at Volterra Partners LLP, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can
Revolutionise the World
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