It’s Official: A Lost Decade for the US Economy

 

012916gdpUS real GDP growth was just 0.7% annualized in the fourth quarter, a weak way to end 2015. Never like to see the Zero Handle.

Not that it was such a great full year, either. The American economy remained stuck in meh mode, expanding at just 2.4%, the same as in 2014. Now, from the end of World War II through 2005, the economy grew at an average annual rate of 3.5%. So 3%-ish growth has been what’s normal.

Wait for it … welcome to the new normal. The economy hasn’t managed a single year of even 3% growth since 2005. A lost decade, at least by American standards. (We’re not Japan, after all.)  The rundown: Real GDP growth for 2015 was 2.4%; 2014, 2.4%; 2013, 1.5%; 2012, 2.2%; 2011, 1.6%; 2010, 2.5%; 2009, -2.8%; 2008, -0.3%; 2007, 1.8%; and 2006, 2.7%.

But that’s what happens when you get a near-depression followed by an anemic recovery and expansion. Digging into the numbers, you find a combo of slowing labor force growth and weak productivity to blame. And it’s for those deeper structural reasons many forecasters, such as the Congressional Budget Office, think the US is now a permanent 2% economy rather than a more vigorous 3% economy.

It may not seem like such a big difference but it is. It’s the difference between having a $21 trillion economy in 2026 or a $23 trillion economy. (That $2 trillion difference, by the way, is the size of the entire Italian economy.) And that gap grows larger year after year, decade after decade. And with that growth gap come fewer jobs, lower incomes, and less opportunity.

Just growing as fast as we used to, much less at the accelerated rate suggested by some politicians, will be really hard. Boosting productivity and labor force growth as America ages will be really hard. But not impossible. Social Security reform and immigration could help with the former. Policy also is hardly optimal for innovation, whether it’s taxes, regulation, education, infrastructure, housing, or basic research. Immigration plays a role here, too. So there is room for improvement.

One bit of good news is that there is some evidence suggesting we are under-measuring productivity and real GDP growth. As Goldman Sachs recently argued:

Measured productivity growth has slowed sharply in recent years … But is the weakness for real? We have our doubts. Profit margins have risen to record levels, inflation has mostly surprised on the downside, overall equity prices have surged, and technology stocks have performed even better than the broader market. None of this feels like a major IT-led productivity slowdown. One potential explanation that reconciles these observations is that structural changes in the US economy may have resulted in a statistical understatement of real GDP growth. There are several possible areas of concern, but the rapid growth of software and digital content—where quality-adjusted prices and real output are much harder to measure than in most other sectors—seems particularly important.

If Team Goldman is correct, we might already be at roughly 3% growth. Even so, we can do better. And must.

Now GDP growth isn’t everything, of course. A changing economy might mean even a faster rising tide might not lift all boats — at least not enough. Broadly experienced prosperity should be the goal. And that’s not happening either.

Published in Economics
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  1. Inwar Resolution Inactive
    Inwar Resolution
    @InwarResolution

    As a recent guest of yours pointed out, when you break down that 2.4%, it looks even worse.  0.6% is just population growth.  0.3% is inflation.  And you guest pointed out that the remainder isn’t evenly distributed.  Higher incomes are growing faster than the rest.  So, for the vast majority of the population, real percapita income growth is near 1%.

    Using the “rule of 72”, that means 72 years to double.

    More importantly to me is that if the average is 4%, then even those who are a bit behind are growing.  But, when the average is close to zero, then close to half of the population is probably below zero.  With a 1% average, I imagine that 40% of the population is experiencing decline in any given year.

    Maybe instead of GDP growth we should measure “% of households improving.”

    Those not improving are particularly susceptible to calls for socialism, to populism and to other siren songs of the disaffected.  That’s not healthy.

    • #1
  2. philo Member
    philo
    @philo

    Are the pre- and post-2013 GDP figures in the above chart calculated the same way?

    • #2
  3. Rodin Member
    Rodin
    @Rodin

    If Goldman Sachs is right is this a new phenomena? If it is not a new phenomena then the gap between 3% measured and 2.7% measured is real because it is still a difference between 3+% and 2.7+% unmeasured.

    • #3
  4. Ekosj Member
    Ekosj
    @Ekosj

    I would point to the dreadful pace of new business formation. 8 years of high personal and corporate income tax and capital gains tax rates ( and talk of higher ) … Coupled with the relentless Democrat drumbeat of ‘you didn’t build that’ and ‘corporate greed’ etc. … Maybe they have actuallt managed to tamp down the animal spirits of a generation.

    • #4
  5. Arizona Patriot Member
    Arizona Patriot
    @ArizonaPatriot

    Inwar Resolution:As a recent guest of yours pointed out, when you break down that 2.4%, it looks even worse. 0.6% is just population growth. 0.3% is inflation.

    I think that you’re correct about population growth, but not about inflation.  The OP reported “real GDP” changes, which means inflation-adjusted.

    • #5
  6. Manny Coolidge
    Manny
    @Manny

    Ekosj:I would point to the dreadful pace of new business formation. 8 years of high personal and corporate income tax and capital gains tax rates ( and talk of higher ) …

    Yeah, my gut tells me that’s part of it.  You can’t blame interest rates which are at near zero.  Why aren’t we creating more new businesses?  Capital gains and corporate taxes are certainly contributing.

    The other issue may be that efficiencies are found outside the United States and growth shows up on their ledgers and not ours.  I’ve always been a free trader, but I’ve been questioning it for a couple of years now.  Is offloading work overseas holding back our growth?  I know the theories say otherwise, but perhaps we’re missing a negative dynamic that is an unintended consequence.  Before we go there, let’s lower corporate and capital gains taxes and see what happens.

    • #6
  7. Inwar Resolution Inactive
    Inwar Resolution
    @InwarResolution

    Arizona Patriot:

    Inwar Resolution:As a recent guest of yours pointed out, when you break down that 2.4%, it looks even worse. 0.6% is just population growth. 0.3% is inflation.

    I think that you’re correct about population growth, but not about inflation. The OP reported “real GDP” changes, which means inflation-adjusted.

    You’re quite right.  Thanks for the correction.

    • #7
  8. I Walton Member
    I Walton
    @IWalton

    We really don’t know if there is growth or not, or if our net worth as a nation is rapidly declining or growing.   We don’t know how to adjust for inflation or quality increases or capital depreciation unless it’s part of business reported income.  Then we have to summarize it all with averages that lose all important information.  We treat government expenditure as if it were output even though it is most often a burden on real production rather than something valuable in itself. We know that the government is taking more of our reported income.  We know that the government has created great uncertainties through regulations that are unclear and change on a whim, we think we know that most people are earning nominally less than in the past and we think that we know that many are not working at all.  They get welfare and they get unemployment insurance but they may be working.   We don’t know much.  But our leaders tell us they know how to make it all better if we just let them increase the burden on the rest of us.  And we let them.

    • #8
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