Economic Growth in the US in the aftermath of the Great Recession: What’s behind the Sluggish Recovery?
The post-recession period in the US has shown that economic growth is not what it used to be. The annualized, real GDP growth over the period 2010-2015 was 2.1%, compared to the 3.4% growth during the sixty-year period that goes from 1947 to 2007. When expressed in GDP per capita terms (that is, when changes in population are factored in), the difference is still blatant: 1.3% in the post-crisis years versus a 2.1% annualized growth between 1947 and 2007.
When looking at labor productivity, the main ingredient of long-term economic growth, the picture is not much better. Over the period 2010-2015, labor productivity, measured as the percentage change in GDP per hour worked, grew at an average rate of 1%, far from the long-term rate of 2.4%.
The causes for this situation are varied as suggested by Greg Mankiw in a recent article in the NYT. Some have argued that the sluggish productivity growth and, as a result, the slow GDP expansion are part of a “new normal” scenario, which has been defined as a period of low economic growth resulting from several structural economic, demographic and technological trends. The proponents of this “new normal” paradigm point at different causes to explain this phenomenon.
According to the American economist Robert J. Gordon, the deceleration in productivity growth is closely linked to a slowdown in technological innovation. Gordon claims that the golden age of innovation that contributed to establish the longest period of prosperity in the history of the US is over. This period was characterized by a number of innovations (the electric lightbulb, the internal-combustion engine, etc.) that helped boost productivity and economic growth. In contrast, Gordon argues that the new innovations that the digital era has brought are not increasing productivity in the same way that electricity and other inventions did in the past.
Even accepting Gordon’s thesis, it should be noted that past productivity does not determine future productivity. In other words, the fact that new innovations have not resulted in higher productivity growth yet does not mean that they will not do so in the future, especially when one takes into account the lag period between the introduction of a new innovation and the gain in productivity brought about by that innovation.
The secular stagnation theory, first proposed by Alvin Hansen during the Great Depression, has been recently employed by Larry Summers to explain the current economic landscape. Summers points out that low inflation and economic growth are direct consequences of a structural weakness in aggregate demand (specifically in its investment component), which in turn results from the “increasing propensity to save and a decreasing propensity to invest” in capitalist economies. For Summers, the solution is simple: an increase in public spending that boosts aggregate demand and leads to a reduction in savings, an increase in interest rates and, eventually, to strong GDP growth.
Summer’s analysis has two major flaws. First, even though he suggests some plausible explanations for the reduction in investments, he dismisses two other factors that could account for the disappointing level of investments: the private sector is still highly leveraged and the Fed’s monetary policy over the last years has not helped in the deleveraging process; and economic uncertainty resulting from the world economic situation. More importantly, Summer’s recipe does not tackle the causes but the consequences. Using fiscal policy to boost aggregate demand does not solve the structural problems that have led to fewer investments (whatever they might be). Second, he underestimates the potential negative effects of increasing fiscal deficits on the US economy in the long term.
Another factor that contributes to explain the sluggish economic growth is demographics. In accordance with this theory, the retirement of the baby boom generation, historically low birth rates, and a steady decline in the labor force participation rate since 2009 have contributed to weaken the post-crisis expansionary phase in the US. Assuming the validity of the demographic hypothesis, the solution seems straightforward: an immigration reform that increases the annual flow of immigrants and helps alleviate the demographic problems the US will be facing in the upcoming years.
Some economists, without dismissing the importance of some of the factors already mentioned, have opted for an alternative explanation, which I will refer to as the “self-inflict malaise” hypothesis (expression coined by the German economist Hans-Werner Sinn). Sinn argues that low growth results directly from the unconventional monetary policy carried out by the Fed to avert a deeper recession. Particularly, he maintains that the so-called “creative destruction” process that always takes place in the aftermath of a crisis has been prevented from happening. Companies that should have disappeared due to failed business models have been artificially kept afloat to the detriment of new innovative companies that would have taken their place in the absence of QE (see graph above).
In line with this “self-inflicte malaise” theory, Claudio Borio, in a paper published in December last year, attributes the low productivity growth to the misallocations of capital and labor undertaken during the expansionary phase that led to the 2008 financial crisis. Borio shows that the credit boom that preceded the crisis has had a direct impact on the post-crisis, sluggish productivity and economic growth through “labor reallocations towards lower productivity sectors”.
Regardless of the causes, the consequences of low economic growth for the future of the US economy are potentially huge. As reported by the Mercatus Center, the difference between growing at 2 or a 3% rate can be dramatic in the long term. And that difference is not just an empty number: it could have a real repercussion on the welfare of millions and millions of citizens in the following decades.
Pictures are Creative Commons Images Money
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