Is America’s Lost Decade (Plus) of Growth About to End?

 

With a preliminary fourth-quarter estimate of 1.9%, US real GDP rose 1.6% in 2016, according to the Commerce Department. It also means US has not notched a 3% GDP year since 2005. And not a 4% year since 2000. In terms of economic growth, at least, the US has suffered a lost decade … plus.

In a recent post, “So did Obamanomics work or not?”, I tried to offer some perspective about how to look at this long stretch of middling growth (even assuming some mismeasurement issues), everything from cyclical issues like the Financial Crisis to secular ones such as productivity and labor force growth. I also noted that “growth can be faster, mobility higher, opportunity greater” than what Americans have been experiencing. This is not as good as it can get.

But what about the nearer-term outlook? There’s a lot happening in Washington right now. And while much is uncertain, it seems likely a bunch of fiscal stimulus is on its way in the form of tax cuts and infrastructure spending. Just how much will all that boost growth? Goldman Sachs takes a shot at answering that question:

We have argued that the US economy is basically at full employment. Nevertheless, we expect a fiscal easing of about 1% of GDP over the next year. To investigate the economic implications of this easing, we relate the growth and interest rate effects of fiscal policy to the stage of the business cycle using two different cross-country data sets.

We find that when the economy is at or above full employment, fiscal easing has a smaller effect on growth but a bigger effect on interest rates. This supports our forecast that the upcoming fiscal easing in the US will boost growth only modestly but will contribute to a bigger increase in both short-term and long-term interest rates than currently discounted in the bond market.

Of course, I guess, if you think the US is nowhere near full employment — perhaps due to low labor force participation, so-so wage growth, and continued decent monthly job growth — maybe there’s more oomph to be had than what Goldman is reckoning. If not, then the US economy is likely to feel more like same-old, same-old than a sudden break with recent experience.

Published in Economics
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  1. J Climacus Member
    J Climacus
    @JClimacus

    James Pethokoukis:But what about the nearer-term outlook? There’s a lot happening in Washington right now. And while much is uncertain, it seems likely a bunch of fiscal stimulus is on its way in the form of tax cuts and infrastructure spending. Just how much will all that boost growth?

    Fiscal stimulus and infrastructure spending… where have I heard that before? How many times must we repeat this, and how much larger must the national debt grow, before we finally admit that government debt and spending does not boost growth or create prosperity?

    • #1
  2. Daniel Brass Inactive
    Daniel Brass
    @DanielBrass

    As a person who has a degree in Economics and a deep held believe in the wisdom of the market and Invisible Hand, I would really like to see the federal government get out of the way of American industry and just let us get it on.  In so many ways, starting with GWB and turned to 11 under President Obama,  the federal government has acted in a way that restrains growth, punishes success and (in my judgement the worst) discouraged risk-taking. If President Trump wants my full support, just stop all of this stuff.   The American economy will boom like it did under President Reagan an during the Internet revolution under President Clinton if you do.

    • #2
  3. I Walton Member
    I Walton
    @IWalton

    Tax cuts are not fiscal stimulus, they raise the return to work, savings and investment.  Infrastructure spending is not fiscal stimulus,  the return to such spending  is measured by how private investment responds to lower costs because of better infrastructure, not because we hired folks to build things.  The latter are costs not returns.  Could we please get off the Keynesian narrative.   Our economists are like progressives, they have one narrative which reality can’t penetrate.  Keynesian spending makes no theoretical sense nor has it been shown empirically to work.   While econometric studies are always weak and conflicting, they do not confirm Keynesian theory, except in the same way global warming models confirm global warming worries.   In an open economy this should be obvious because any spending over and above our savings is spent on imports using foreign savings.   While it is always possible that spending can help, it’s shear good luck because it is impossible for Congress to know where to spend in order to hire the folks who have lost their jobs in a downturn.  Nor if they did know, whether they’d make things worse or better.

    • #3
  4. Chris Campion Coolidge
    Chris Campion
    @ChrisCampion

    As indicated, there’s no correlation to growth in real GDP based on federal spending, under any guise.  GDP bounces around regardless of the inevitable climb upward into a glorious future filled with massive debt overhangs and annual debt servicing that will crowd out all other spending, no matter who’s got the majority or White House.

    • #4
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