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Why the U.S. Economy Deserves a “B-” Grade

Daily Ticker

If Business Insider's Josh Barro and I had to grade the U.S. economy right now, we'd give it a "B-."

The economy is growing, which is good, but it's growing at a rate that almost no one is happy with.

The first estimate of economic growth in the second quarter, for example, was only 1.7%. And growth in the first quarter was revised down to a pathetic 1%. That compares to a usual growth rate of 3% or more for a healthy economy recovering from a recession.

So, what's the problem?

Well, our two political teams are blaming each other. And it's true that our government does bear a lot of the responsibility by slashing spending earlier this year. But there's also another big sector to blame, one that has nothing to do with the government: Namely, big American businesses.

Related: The Great Wage Debate: Should Companies Pay Workers More?

Before we get into that, here's the basic economic equation. Ignoring imports and exports (for simplicity), the size of our economy is the sum of the following parts:

PERSONAL CONSUMPTION (Consumer Spending)

+

PRIVATE INVESTMENT (Business Investment)

+

GOVERNMENT SPENDING

Right now, those three buckets of spending are adding up to lame economic growth.

So which one is to blame?

Well, first let's look at the biggest component of GDP--Personal Consumption (consumer spending). Personal Consumption these days is a higher-than-average ~71% of GDP. Importantly, personal consumption has stayed at about that level for the last several years. It's actually higher than it was from 2000-2007 and much higher than it was in the halcyon days of the 1990s. So if we're wondering who is to blame for our crappy economy, we can't blame American consumers. Despite high unemployment and lousy wage growth, consumers are still spending.

Related: Your Debt, Not the Government's, is Hurting the Economy: Robert Kuttner

So, how about government spending? Is the government doing its part? Well, here we're going to find one of the big culprits. Unlike consumer spending, total government spending (federal, state, and local) has dropped sharply as a percent of GDP--from 39% of GDP a few years ago to only 35% today. This drop in government spending is acting as a big drag on GDP growth.

But our government--Republicans, mostly--have declared that it is crucial that we cut government spending. Republicans insist that we have to take our medicine now (while a Democratic president can be blamed for it) or die in agony later. And Democrats are unable to persuade enough Americans that this is unnecessary. So we're stuck with government spending cuts, at least for this year.

So that leaves the third category of GDP--business investment. How are businesses doing? Are they investing aggressively in their future and our country?

Heck, no!

If you're looking for the real group to blame for our crappy GDP, you've found it: American corporations.

American corporations have become so cautious and greedy and short-term focused that they're barely investing at all.

American business investment has increased since the depths of the recession, but it is still at a level that is normally only seen in recessions (e.g., pathetic).

So, why aren’t American businesses investing?

Well, if you listen to some of the people on TV, they'll tell you that it's the result of "policy uncertainty" or "high taxes" or "too much regulation."

This might sound persuasive, but it is self-serving nonsense.

The real reason American corporations aren't investing is that the folks who control and run them have become focused on only one thing: Maximizing short-term profitability.

When the folks who control and run American corporations get together to set future goals, for example, they don't agree to, say, hire and invest heavily for the next several years in order to produce higher earnings and stock prices 5-10 years from now. In a business and investment culture ruled by annual bonuses and quarterly earnings reports, 5-10 years from now is so far into the future that it's barely worth considering. Instead, the folks who control and run American corporations set annual bonus and quarterly earnings targets designed to maximize profits and stock prices today.

In a period in which economic growth is weak (because corporations aren't investing), the way to hit annual profit targets and get those bonuses is to "increase efficiency." And "increasing efficiency," everyone knows, is usually just a synonym for cutting costs, firing employees, and scrimping on investment.

So big American corporations are maximizing their profits and letting mountains of cash build up on their balance sheets. In the process, they are starving the economy and their employees of cash that would otherwise turbo-charge consumer spending and economic growth.

One of the big reasons the U.S. economy is still weak is that our corporations and their owners have become cautious, myopic, and greedy. Instead of investing in the future, and sharing more of their vast wealth with the people who generate it (their employees), they are hoarding their cash and maximizing their short-term profitability.

This business philosophy might--might--prop up stock prices for the near term.

But it's also gutting America's middle class and hobbling the overall economy. And, in the process, ironically, it is constraining revenue growth for the same corporations that are trying to scrimp and save their way to maximized profitability.

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