GDP Figures Show Economy Still In Trouble

There was a little more bad news regarding the economy released this last week. It was announced that the Gross Domestic Product (GDP) for the second quarter of 2011, which was originally thought to be an annualized rate of 1.3%, was actually only 1.0%. The correct figures are shown in the chart above. This is better than the annualized rate of growth from the first quarter, which was only 0.4%, but it's not nearly enough to stimulate job creation or help pay down the budget deficit.

In fact, the chart above is a little misleading because it shows the annualized rate of growth for each quarter rather than the actual growth in the quarter. The annualized rate means that if all four quarters showed the same growth that the last quarter did, then the rate of growth for the year would be 1.0% -- meaning the actual rate of growth for the quarter was only 1/4 of that, or 0.25% (and the actual growth for the first quarter was 0.1%). That means if the final two quarters of this year equal second quarter growth, and there is little reason to believe they would do better than that, then the total yearly GDP for 2011 would be a whopping 0.85%!

The Congressional Budget Office has predicted a GDP of 2.4% for 2011 (with 2.6% for 2012 and an average of 3.6% for the following three years). That seems like an incredibly optimistic prediction to me. Where is the demand going to come from for this growth -- the free-enterprise fairy? It's certainly not going to be a result of government actions, because the recent actions of the federal government are to contract the economy (and therefore demand) rather than expand it.

The Democrats seem to be floundering around looking for a solution. But the Republicans are even worse. They have "solutions", but those solutions would actually cause further damage rather than fix the economy -- just like these same policies did when enacted by Herbert Hoover as a "solution" to the Great Depression.

The Republican solution is to slash government spending, especially on programs that put money into the hands of hurting Americans, and cut taxes for the rich. Their trickle-down, or supply-side economics, says if we give rich people more money they will use that money to make more goods (and hire more workers to do that). In simplistic terms, if you build it they will buy it. The problem with that is that it is backwards to how economics really works. Supply does not create demand. Demand creates supply.

The biggest reason the GDP is so sluggish right now is because demand is very low -- consumers are simply not buying in large enough quantities to produce growth. Why is demand so low? Because there are 14-17 million people unemployed, another 8-9 million underemployed (working part-time because they can't find full-time work), millions more working for minimum wage or less, and stagnant wage-growth for those lucky enough to have a job.

The only people doing well in this economy are the rich and giving them more money won't stimulate demand since they already have enough money to buy whatever they want. The only way to stimulate demand is to put more money into the hands of the bottom 90% -- not the top 10%. The bottom 90% would spend that money, which create demand, which would stimulate job creation. Giving the rich more money only fattens the bank accounts of the rich, but giving ordinary citizens (the bottom 90%) more money helps everyone -- even the rich, because the demand for their goods and services would rise and give them more profits (even if they had to pay a higher tax rate).

What the government should be doing is putting more money into social programs to help those who are hurting, and tax the rich more to pay for it. Republicans claim this would stifle growth, but they are wrong. It would create demand (and jobs), and as I said, that would be good for everyone.

That is also the only way out of the deficit crunch. When demand rises and jobs are created, tax revenues will rise (assuming the new jobs aren't minimum wage jobs) and the deficit will be lowered. The only way out of a recession is through spending to create demand and jobs. Cutting government spending didn't work for Hoover, and it won't work now.