GDP "Growth" at 1.9%

The government released another estimate of first quarter GDP performance this morning. This is the third estimate, so it should be pretty close to accurate; it showed a growth rate for the quarter of 1.9%.

This growth rate tells you pretty much all you need to know about unemployment. At 1.9% growth, the economy does not produce many new jobs. Employment growth stagnates. The unemployment rate rises. The lack of new jobs means that incomes also stagnate and this further slows the growth of GDP. We are seeing this in action in the second quarter which will end this week. The employment figures so far in the second quarter have not been anywhere as good as those in the first quarter. And the news does not seem to be getting any better. Unemployment claims for last week were almost unchanged from last week according to another government report this morning.

The problem right now is that the economy needs a big dose of demand to pull it out of its lethargy. The question is where to find such a major source of demand. President Obama recommends raising taxes on the wealthy which will actually reduce aggregate demand; that will hardly work. Obama also wants to send money to the states to keep state employees working. Again, this will not increase demand; at best, it will prevent a decrease, and that is not likely. Obama's last idea is to go back to construction projects, the "shovel ready projects" of the failed stimulus. These projects, if funded, will probably take a year or so to get started. It is not too little too late. It is way too little and way too late. In other words, Obama's ideas will not and cannot work.

So where could the USA find a big increase in demand to boost the economy and change its direction? There are two places that are blatantly obvious: 1) Opening up full energy development would mean a big push in total demand. Drilling for oil not only results in employment for those in the industry, but each barrel of oil produced means that more money stays in the American economy and increases demand rather than going to Saudi Arabia or Iran. The Keystone Pipeline is also the mother of all shovel ready jobs. The estimates are that opening up full energy development could add 1% or more to GDP growth each year. That means millions of additional jobs. 2) American companies have way over a trillion dollars sitting in accounts abroad, but they cannot bring the money back to the USA without having to pay 35% in taxes. Not surprisingly, these companies keep the funds outside the country to avoid the tax. Obama wants to change the law to tax the money even though it is outside the country; that would mean more money for the government but no increase in demand. Mitt Romney want to have a temporary tax holiday which would reduce to tax rate to something like 5%. This would encourage these companies to bring much of the money back to America. If only half of the funds were brought back here, it would mean that suddenly there would be about three quarters of a trillion dollars added to the coffers of American business. Much of that money would be invested in new plant and equipment leading to new jobs. Another part of that money would be paid out in dividends to shareholders, again leading to a major increase in demand by these shareholders. Still more of the funds would be used to repurchase shares, another move that would inject the funds back into the American economy. And all this would happen without any increase in debt by the government. Indeed, the extra activity would probably generate something like $100 billion or more in tax revenue for the federal government. This plan should work.

We need a president who understands the economy and how it works.