The good times may be over for good. In a speech to the Economic Club of New York yesterday, US Treasury Secretary Jack Lew said the US GDP growth rate, adjusted for inflation, is now projected to run a little above 2% a year. That would be a significant downshift from the 3.4% average growth rate from the end of World War II until 2007.
Look at it this way: If the US economy grows at its traditional rate between now and 2040, it would double in size to $37 trillion vs. just 50% growth to $27 trillion at the slower pace. And remember, that growth gap — $10 trillion in 2040 – is cumulative. It would persist year after year and get larger as time passes.
So what’s wrong? An excellent New York Times piece today by reporter Binyamin Appelbaum notes that while economist accept slower growth is partly the result of long-term trends, they also think the aftermath of the Great Recession and the Not-So-Great Recovery are playing a role. Among the former factors, you have (a) the demographically-driven decline in labor force participation and (b) an apparent productivity slowdown starting in the mid-2000s as the pace of technological innovation and diffusion has slowed.
Among the latter factors, you have causes that will seem more or less explanatory, depending on political leanings. Conservatives will like the paper, “Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis,” by Stanford University economist Robert Hall. He points to the growth in disability and food-stamp programs as hurting labor-force participation. Liberals, on the other hand, will see much wisdom in “A Model of Secular Stagnation” by Gauti Eggertsson and Neil Mehrotra, which argues post recession deleveraging and an increase in inequality “can lead a permanent (or very persistent) slump.”
In his speech, Lew said, “that many today wonder whether something that has always been true in our past will be true in our future.” (Indeed, the 2013 Obama budget declared, “In the 21st Century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras … .”) Signs abound that the answer to that question is, “No, it won’t.” And while Washington should debate appropriate policy responses, it first needs to accept the reality of trends, both old and recent, that are fundamentally making America’s pursuit of happiness more difficult.