The economy grew 0.7 percent in the 4th quarter, bringing its rate for the full year (4th quarter to 4th quarter) to 1.8 percent. That is a substantial slowing from the 2.5 percent rates of the prior two years. By far the major component boosting growth was consumption, which grew at a 2.2 percent annual rate, driven largely by continued strong growth in durable goods consumption, which grew at a 4.3 percent annual rate. Housing was also a big contributor to growth, expanding at an 8.1 percent annual rate and adding 0.27 percentage points to growth.
Inflation continues to be nowhere in sight. The core PCE grew at just a 1.2 percent annual rate in the quarter, bringing the increase for the year to 1.4 percent, well below the Fed's 2.0 percent target.
The Washington Post is unhappy that support of the TARP appears to be a liability on the campaign trail. After all, it tells readers:
“Then-Federal Reserve Chair Ben S. Bernanke and Treasury Secretary Henry M. Paulson declared it indispensable to prevent another Great Depression.”
Yep, that would be Henry M. Paulson, who was CEO at Goldman Sachs before taking the job as Treasury Secretary. As far as Chair Bernanke’s assessment, it would be interesting to hear why he didn’t explain that the Fed single-handedly had the ability to keep the commercial paper market operating, until the weekend after TARP passed.
While the initial downturn almost certainly would have been steeper had Congress not passed the TARP and we allowed the magic of the market to sink Goldman Sachs and the other Wall Street banks, it is absurd to claim that this would have led to another Great Depression. We know the trick to get out of a Great Depression: it’s called “spending money.”
The source of weakness in the economy is the unmentionable elephant in the center of the room, the trade deficit. We have an annual trade deficit of more than $500 billion (@3 percent of GDP). This is a gap that must be made up by increased spending in one of the other components of GDP. (This is basic accounting – it is inescapably true. If you don’t like it, then you have a problem with logic.)
In the late 1990s we filled the hole in demand with demand created by the stock bubble. In the last decade we filled the hole in demand with demand created by the housing bubble. In the absence of bubble-driven demand we could get back to full employment with larger budget deficits, but that is not fashionable with the politicians and policy wonks in Washington. Therefore, we have to spin out wheels and pretend that the weak economy is a big mystery and come up with all sorts of convoluted stories like Samuelson’s about the trauma of the Great Recession.
One more thing, we owe our large trade deficits to the huge over-valuation of the dollar that we got in the wake of the bailout from the East Asian financial crisis in the late 1990s. This was all the doings of the Clinton administration, which directed the I.M.F.’s bailout of the region.
The failure of the bailout and bubble-driven growth path on which it set the country is why many of us cringe when they hear Hillary Clinton talk about turning to her husband for economic advice in her administration. The last thing we need is another round of bubble-driven growth.