It's hard to downplay how bad things were 10 years ago. The dot-com bubble burst, erasing $5 trillion of wealth faster than it was created. Decades of slowly eroding U.S. manufacturing jobs turned into a devastating burn. Enron and WorldCom collapsed amid fraud. And then 9/11 hit -- how does it get worse than that? What saps an economy is fear, and 9/11 produced lots of it. Not surprisingly, 2001, 2002, and 2003 saw far slower job growth than we've experienced over the past two years.
And yet! In the three years after 9/11, real consumer spending rose by 3% a year -- faster than the previous 20. Real GDP growth averaged 2.6% after 9/11, not far below the long-term average.
How did this happen?
The answer is straightforward: leverage.
One of the most incredible charts I've seen comes from the finance blog Calculated Risk. It shows what GDP growth would have been in the early 2000s without mortgage equity withdrawal, or the extra boost the economy got from homeowners using their homes as ATMs. From 2001 to 2006, as-reported GDP increased at an average rate of around 3%. Without mortgage equity withdrawal, however, that growth would have averaged less than 0%. Put another way, deprived of leveraging mortgages, the economy would have been in or near recession for most of the last decade -- just what one might expect when considering the hell left behind from the dot-com bust and 9/11.
All of this is coming back to haunt us today.
Easy come, easy go
The chorus over whom to blame for today's slow economy is mostly aimed at public policy, with a little hate left over for big banks like Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) . "[President Barack Obama's] policies are not creating the necessary jobs, and he has no plan to do anything about it," said presidential contender Tim Pawlenty last week. For his part, Obama has reckoned that Republicans "drove the car into the ditch."
Neither is entirely fair. Public policies often have lower impacts than some think. The correlation between tax rates and jobs growth, for example, might seem straightforward at first thought -- higher taxes equal lower job growth -- but such a relationship is elusive when looking at the data. "Government gets blamed too much," Warren Buffett said last week, "and it may get too much credit when things do improve."
Policies can and do make things worse -- the Great Depression is the best example. But by far the biggest driver of economic success over time is productivity growth and population growth. The good news is that both tend to be fairly consistent over time and, for the United States, rising rapidly. Economies, like stocks, have intrinsic drivers, or the real worth once all the noise is stripped away. For stocks, that value is earnings. For economies, it's productivity and population.
Intrinsic drivers guide long-term results, but what happens in between is erratic. The reason stocks went nowhere over the last decade was not because earnings -- or intrinsic value -- stagnated. Indeed, earnings grew quite nicely throughout the decade. But returns that should have been spread out between 2000 and 2010 were experienced all at once between 1995 and 2000. From 1995 to 2010, investors achieved a very nice average annual return driven by fairly stable earnings growth. Those 15-year returns just happened to be frontloaded into a five-year period in the late '90s. It's as if we had average rainfall for the year, but got there by a one-day flood followed by 364 days of sun.
Economies go through the same phenomenon. The reason our economy is stagnant today is not because its intrinsic drivers are crumbling -- productivity and population growth are fairly strong. It's stagnant because what should have been a slow economy last decade frontloaded a boom by robbing growth from today. GDP growth should have been flat last decade; instead it was 3%, driven almost entirely by leveraging real estate. Growth should be decent today, but it's not because we're paying for last decade's frontloaded boom by paying off debt.
This is simple stuff, but gets ignored too often. Growth isn't slow because of public policies; it's slow because we're deleveraging. Growth won't return when someone else is elected into office; it will return when we're done deleveraging. That won't be this month, next month, or even next year. At current rates, it'll be several years at least. That's why it's so hard to recover today. Don't blame current policies. Blame past choices.
Fool contributor Morgan Housel owns B of A preferred. Follow him on Twitter @TMFHousel. Try any of our The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.