Slow Economic Growth: The New Normal?
Another round of GDP growth figures are out, and they show that the U.S. economy continues to grow far slower than necessary to sustain job growth. Is this a temporary problem, or something we can expect to live with for the foreseeable future?
The first round numbers on economic growth in the 3rd Quarter aren’t any more encouraging than any of the other economic statistics we’ve been seeing lately:
The United States economy grew at an annual rate of 2 percent in the third quarter, the Commerce Department reported Friday, as it struggles to gain any momentum for a sustained recovery.
Though the recovery officially began in June 2009, growth since has been tepid, at best. The economy expanded at a 1.7 percent pace in the second quarter, down sharply from 3.7 percent in the first.
Demand, seen as crucial to re-igniting the American economy, appeared flaccid in the third quarter, although there were, here and there, hints of increased consumer spending. Income growth adjusted for inflation and taxes slowed noticeably, rising 0.5 percent in the July-September period after increasing 4.4 percent in the second quarter. And at the other end, prices excluding food and energy increased 0.6 percent, compared with 0.8 percent in the second quarter.
In recent weeks, the economy has presented two faces, which is reflected in the latest G.D.P. numbers. There have been fledgling signs of growth: home sales and chain store sales are up bit, a swelling stock market has raised consumer confidence a few notches, and jobless claims fell noticeably last week, albeit to a still high and painful level.
At the same time, the steroidal effect of the stimulus spending is fading. City and state governments have shed tens of thousands of employees, and states face a sea of red ink as they look at next year’s budgets.
An economy growing at a sluggish 2 percent rate, most economists agree, cannot produce nearly the demand needed to bring down the nation’s painfully high 9.6 percent unemployment rate. The economy needs to produce 130,000 to 150,000 jobs a month just to keep pace with population growth, a number it has not hit in many months.
It is important to note that Friday’s number is a Commerce Department estimate based on a reading of many sectors of the economy, and that the final number may be revised substantially higher or lower. In the second quarter, the surprise was to the downside: the initial G.D.P. report had placed the growth rate at 2.4 percent, and it subsequently wheeled down to an annual rate of 1.7 percent.
So, it’s entirely probable that this 2% figure will eventually revised downward and that we’ll learn that economic growth was actually somewhere closer to 1.5%, which is obviously not sufficient to grow the economy enough to replace the jobs that have been lost since 2008.
So that leaves us with the obvious question of when the economy will return to the growth rates that Americans are used to, or if it ever will. As Dave Schuler noted over at his own site several weeks ago, there is a distinct possibility that the United States is entering an era where our economic growth will make the 1-2% of Europe, rather than the 4-5% that we’ve become used to in the post World War II era:
[T]he experience in growth over the last twenty years shows a markedly slower rate than prevailed over the previous twenty years or the previous forty years.
Second, the period since 1990 has included two bubbles: the dot-com bubble and the real estate bubble. Those bubbles are clearly evident in the peaks over the last twenty years.
What forces could lead to growth at the 4% or higher level? Besides the unexpected which is just that, unexpected, I can only think of two. If you believe that we’re going to experience growth at a level higher than that of other developed countries you must either believe that we’re going to continue to experience a high level of immigration and/or that we’re going to continue to experience bubbles
As to the first, it’s worth noting that we seem to be entering another era in American politics where anti-immigrant sentiment is on the rise. If anything, I would expect U.S. immigration laws to become more restrictive in an era of slow economic growth, even though that has the ironic effect of itself contributing to the lack of economic growth. As to the second, we are learning today what the consequences of an economic bubble actually is. Yes, they lead to a few years of spectacular growth, and many people get rich quick. In the end, though, the artificial diversion of resources that an economic bubble represents will end up being corrected when the bubble collapses and takes the economy down with it. Creating economic bubbles isn’t all that hard, of course. All it takes is an incredibly loose monetary policy at the Federal Reserve. What happens thereafter, though, makes whatever benefits the bubble provides not worth the cost.
Let’s assume, then, that the overall conclusion is true and that the U.S. is headed for an era when our long-term economic growth is in 1-3% range. Economically, that would mean that the “natural” unemployment rate would end up being higher than the 5% that we’ve been taught to accept for so long. Culturally, it may mean that American optimism is a thing of the past. And, politically, the consequences are unknowable but it seems clear to me that American politics in such a world would be far more contentious and radicalized.
There’s a reason that politics in the 1950s gave us men like Eisenhower and Stevenson, and there’s a reason what politics in 2010s are giving us Sarah Palin, Glenn Beck, Alan Grayson, and the 24/7/365 cable “news” culture, and I would submit that much of it is related to the fact that people are beginning to believe that they are going to have to fight over pieces of a pie that isn’t going to grow nearly fast enough to sustain the standard of living we’ve become used to.