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ECONOMI CTRENDS

WereinaLowGrowthWorld.HowDid
WeGetHere?
NeilIrwin@Neil_Irwin

AUG.6,2016

Onecentralfactabouttheglobaleconomylurksjustbeneaththeyearsremarkable
headlines:Economicgrowthinadvancednationshasbeenweakerforlongerthanit
hasbeeninthelifetimeofmostpeopleonearth.
TheUnitedStatesisaddingjobsatahealthyclip,asanewreportshowed
Friday,andtheunemploymentrateisrelativelylow.Butthatishappeningdespitea
longtermtrendofmuchlowergrowth,bothintheUnitedStatesandother
advancednations,thanwasevidentformostofthepostWorldWarIIera.
Thistrendhelpsexplainwhyincomeshaverisensoslowlysincetheturnofthe
century,especiallyforthosewhoarenottopearners.Itisbehindthecheapgasoline
youputinthecarandtheultralowinterestratesyouearnonyoursavings.Itis
crucialtounderstandingtheriseofDonaldJ.Trump,Britainsvotetoleavethe
EuropeanUnion,andtheriseofpopulistmovementsacrossEurope.
Thisslowgrowthisnotsomenewphenomenon,butratherthewayithasbeen
for15yearsandcounting.IntheUnitedStates,perpersongrossdomesticproduct
rosebyanaverageof2.2percentayearfrom1947through2000butstartingin

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2001hasaveragedonly0.9percent.TheeconomiesofWesternEuropeandJapan
havedoneworsethanthat.
Overlongperiods,thatshiftimpliesaradicallyslowerimprovementinliving
standards.Intheyear2000,perpersonG.D.P.whichgenerallytrackswiththe
averageAmericansincomewasabout$45,000.Butifgrowthinthesecondhalfof
the20thcenturyhadbeenasweakasithasbeensincethen,thatnumberwould
havebeenonlyabout$20,000.
Tomakemattersworse,fewerandfewerpeopleareseeingthespoilsofwhat
growththereis.AccordingtoanewanalysisbytheMcKinseyGlobalInstitute,81
percentoftheUnitedStatespopulationisinanincomebracketwithflatordeclining
incomeoverthelastdecade.Thatnumberwas97percentinItaly,70percentin
Britain,and63percentinFrance.
Likemostthingsineconomics,theslowdownboilsdowntosupplyanddemand:
theabilityoftheglobaleconomytoproducegoodsandservices,andthedesireof
consumersandbusinessestobuythem.Whatsworrisomeisthatweaknessinglobal
supplyanddemandseemstobepushingeachotherinaviciouscircle.
Itincreasinglylooksasifsomethingfundamentalisbrokenintheglobalgrowth
machineandthattheusualmenuofpolicies,likeinterestratecutsandmodest
fiscalstimulus,arentuptothetaskoffixingit(thoughsomewelldevisedpolicies
couldhelp).
TheunderlyingrealityoflowgrowthwillhauntwhoeverwinstheWhiteHousein
November,aswellasleadersinEuropeandJapan.Anentirewayofthinkingabout
thefuturethatchildrenwillinevitablyliveinamuchrichercountrythantheir
parentsisthrownintoquestionthelongerthislasts.
Thefirststeptotryingtoreversetheslowdownistounderstandwhyits
happening.Agoodwaytodothatistoreexaminepredictionsfromsmart
economists.
InJanuary2005,asitdoeseveryyear,theCongressionalBudgetOfficereleased
itsforecastfortheUnitedStatesbudgetandeconomicoutlookoverthedecadeto

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come.IftheC.B.O.sprojectionshadcometrue,theUnitedStateswouldhavehad
$3.1trillionmoreeconomicoutputin2015thanitactuallydid17percentmore.
Evenifthesteepcontractionof20082009hadnthappened,theshortfallwould
havebeen$1.7trillion.
Asamatterofarithmetic,theslowdowningrowthhastwopotential
components:peopleworkingfewerhours,andlesseconomicoutputbeinggenerated
foreachhouroflabor.Bothhavecontributedtotheeconomysunderperformance.
In2000,RobertJ.Gordon,aNorthwesternUniversityeconomist,publisheda
papertitledDoestheNewEconomyMeasureUptotheGreatInventionsofthe
Past?Itarguedthattheinternetwouldnothavethesametransformativeimpacton
howmucheconomicoutputwouldemergefromanhourofhumanlaboras20th
centuryinnovationslikeelectricity,airtransportandindoorplumbingdid.
Itwasadistinctlyminorityviewinthatapexoftechnologicaloptimism.People
said:Productivitygrowthisexploding,Gordon.Yourewrongwereinanewage,
Mr.Gordonsaid.Butasproductivitygrowthslowedseveralyearslater,people
startedtotakemypointofviewmoreandmoreseriously.
Heofferstheexampleoftheselfcheckincomputertechnologythatairlines
use.Whenintroducedintheearly2000s,itreallydidmeangreaterproductivity:
Fewerairlineclerkswereneededforeverypassenger.Butthegainwasmoreaone
timebumpthanacontinuingtrend.
DouglasHoltzEakin,directoroftheC.B.O.atthetimeofthe2005forecastand
nowpresidentoftheAmericanActionForum,saidtechnologyjustseemstobeless
specialandmorecomparabletootherformsofinvestmentsthanithadseemed.
Theforecastersthoughttheaverageoutputforanhouroflaborwouldrise29
percentfrom2005to2014.Insteaditwas15percent.
Butitsnotjustthateachhourofworkisproducinglessthanprojected.Fewer
peopleareworkingfewerhoursthanseemedlikelynotlongago.
TheunemploymentrateisactuallylowerthantheC.B.O.projectedittobea
decadeago(itsawitasstableat5.2percentitwas4.9percentinJuly).Butthe

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unemploymentratecountsonlythoseactivelyseekingajob.Therewerefivemillion
fewerAmericansinthelaborforceneitherworkingnorlookingin2015than
projected.
AnanalysisbytheWhiteHouseCouncilofEconomicAdviserslastyear
estimatedthatabouthalfofthedeclineinlaborforceparticipationsince2009was
causedbyagingofthepopulation(whichwasanticipatedintheprojection),and
about14percentfromtheeconomiccycle.Aboutathirdofthedeclinewasa
mysteriousresidual:youngerpeopleleavingtheworkforce,perhapsbecausethey
sawlittleopportunityorviewedthepotentialwagestheycouldearnasinadequate.
Weakproductivityandfewerworkersarehitstothesupplysideofthe
economy.Butthereisevidencethatashortageofdemandisamajorpartofthe
problem,too.
Thinkoftheeconomyasacarifyoutrytoacceleratefarbeyondthespeedits
capableof,acarwontgoanyfasterbuttheenginewilloverheat.Similarly,ifthe
voluntarilyexitofpeoplefromthelaborforceandlowerthanexpectedgainsfrom
technologicaladvancesweretheentirestorybehindthegrowthslowdown,there
shouldbeevidencetheeconomyisoverheating,resultingininflation.
Thatsnotwhatshappening.Rather,globalcentralbanksarekeepingtheirfeet
ontheeconomicaccelerator,andthatisnotresultinginanyoverheatingatall.
Thedistinctionisimportantifthereistobeanyhopeofsolvingthelowgrowth
problem.Iftheissueisashortageofdemand,thensomemorestimulusshouldhelp.
Ifitisentirelyonthesupplyside,thengovernmentstimulusisnotmuchuse,and
policymakersshouldfocusontryingtomakecompaniesmoreinnovativeandcoax
peoplebackintotheworkforce.
Butwhatifitsboth?
LarrySummers,theHarvardeconomistandaformertopofficialintheObama
andClintonadministrations,watchedasgrowthstayedlowandinflationinvisible
afterthe2008crisis,despiteextraordinarystimulusfromcentralbanks.Evenbefore
thecrisis,economicgrowthhadbeenrelativelytepiddespiteahousingbubble,war

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spendingandlowinterestrates.
InNovember2013,hecombinedthoseobservationsintoamuchdiscussed
speechatanI.M.F.conferencearguingthattheglobaleconomyhad,justmaybe,
settledintoastateofsecularstagnationinwhichtherewasinsufficientdemand,
andresultingslowgrowth,lowinflationandlowinterestrates.
Whilethetheoryisanythingbutsettled,thecasehasbecomestrongerinthelast
threeyears.
Butitmaynotbeassimpleassupplyversusdemand.Perhapspeoplehave
droppedoutofthelaborforcebecausetheirskillsandconnectionshaveatrophied.
Perhapstheproductivityslumpiscausedinpartbybusinessesnotmakingcapital
investmentsbecausetheydontthinktherewillbedemandfortheirproducts.
Mr.Summers,inaninterview,framesitasaninversionofSaysLaw,the
notionthatsupplycreatesitsowndemand:thateconomywide,peopledoingthe
worktocreategoodsandservicesresultsintheirhavingtheincometothenbuy
thosegoodsandservices.
Inthiscase,rather,ashehasoftenputit:Lackofdemandcreateslackof
supply.
Hisproposedsolutionisthatthegovernmentsharplyexpandinvestmentin
infrastructure,whichmightprovideajoltofhigherdemand,whichinturncould
helpthepictureonsupplyhelpingworkerswhobuildroadsandbridgesbecome
reattachedtotheworkforce,forexample.Asithappens,increasinginfrastructure
spendingisamongthefeweconomicpoliciesadvocatedbybothHillaryClintonand
Mr.Trump.
Economichistoryisfullofunpredictablefitsandstarts.WhenBillClintonwas
electedin1992,theinternet,adefiningfeatureofhispresidency,wasrarely
mentioned,andJapanseemedtobeemergingasthepreeminenteconomicrivalof
theUnitedStates.
Inotherwords,theresalotwedontknowabouttheeconomicfuture.Whatwe
doknowisthatifsomethingdoesntchangefromtherecenttrend,the21stcentury

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willbeagloomyone.
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AversionofthisarticleappearsinprintonAugust7,2016,onpageA1oftheNewYorkeditionwiththe
headline:ALowGrowthWorld:OneKeytoPersistentEconomicAnxiety.

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