Many economists are looking for the US economy to break out of its funk in the second half of the year, finally returning to trend GDP growth for the first time since the start of Bernanke’s Little Depression. The 2% recovery will finally be over — but perhaps only for a little while. Capitol Economics sums up what I see as the bear case:
There are reasons to believe that the recent period of sluggish economic growth and near-zero interest rates are coming to a close. While the economy’s potential growth rate is probably now only slightly above 2%, the unused capacity means that actual growth could run at 3% for several years without triggering a rise in inflation. …
The problem that policymakers and investors have to deal with over the next couple of decades is that population growth should trend even lower, as immigration is muted and the birth rate among the indigenous population falls. In addition, even if there is a cyclical uptick over the next year or two, the labour participation rate is subsequently expected to continue the downward structural trend that began a decade ago. This decline appears to be unavoidable, as increasing numbers of the baby boomer generation retire from the workforce. The upshot of all this is that labour force growth will probably average only 0.7% per year. Even if productivity growth averages 1.5% then, over the next decade or two, real GDP growth would average 2.2%.
2. If we are, we should assume we are not and still adopt pro-productivity and pro-innovation policies.
3. It is also possible to boost labor force growth.One idea: eliminating the 12.4% Social Security payroll tax for all individuals aged 62 and older which would a) encourage individuals to remain in the work force and b) make older workers more attractive to employer.