I
t’s never paid to bet against America.” That is the advice long proffered by investment legend Warren Buffett. And yet here we are, with the candidate of one of the two major parties basing his bid for the presidency on the notion that the United States has become a loser nation. Donald Trump’s “Make America Great Again” mantra, which reflects some aspects of the public mood even now, more than seven years after the Great Recession’s end, shows just how hard it can be to heed Buffett’s wisdom. And it reminds us again that Americans have found it difficult to keep the country’s enduring virtues in mind during the spasms of national pessimism that have overtaken it at irregular intervals since the Second World War.
Americans have shown an abiding capacity to express their deep disquiet about the nation’s direction: Maybe this is as good as it’s ever going to get, or worse, maybe tomorrow won’t be as materially prosperous or offer as much opportunity as today or the recent past.
History does record that these moments of misgiving would indeed have been terrible ones in which to bet against the United States. Each bout of pessimism was followed by economic expansion and an upsurge of optimism and national morale. The volatile 1970s reached their emotional nadir 16 months before Jimmy Carter’s reelection defeat, with his “malaise” address. In Ronald Reagan’s 1979 speech, which launched his presidential bid, Carter’s successor said, “They tell us we must learn to live with less, and teach our children that their lives will be less full and prosperous than ours have been; that the America of the coming years will be a place where—because of our past excesses—it will be impossible to dream and make those dreams come true. I don’t believe that. And I don’t believe you do, either.”
Reagan was speaking at a time when fewer than a fifth of Americans were satisfied with the country’s direction, according to Gallup. Country singer-songwriter Merle Haggard had a 1982 hit called “Are the Good Times Really Over?” that reflected the nation’s apparent permanent funk. But that was followed in relatively short order by “Morning in America” and the Reagan boom.
A decade later, the country was awash in angst after the short, sharp recession of 1990–91, when all the talk was of the lack of opportunity for “Generation X,” the cohort that found itself forced to wear second-hand clothing and grungy shirts from Army Navy surplus stores. That angst was relieved by the Internet boom and the fastest growth in incomes since the 1960s.
The lesson these examples seemed to have taught us was that when trouble came, you had to buck up, be patient, and wait for the sputtering American Growth Machine to shift back into high gear. If you sold America at the bottom, you were a sucker.
But maybe this time really is different (to cite a non-Buffett financial aphorism). Most deep downturns were typically followed by robust recoveries, but that hasn’t happened here. The growth in the gross domestic product (GDP) has averaged a subpar 2 percent annually since the end of the Great Recession, making it the weakest recovery since at least World War II. And the seven years before the financial crisis weren’t so hot, either, with GDP growth undershooting its postwar average by a full percentage point.
All in all, using GDP alone, the economy really hasn’t been firing on all gears since the late 1990s. We haven’t seen back-to-back years of 3 percent growth since 2004–5.
During the Republican primary, Jeb Bush said that getting the economy to grow 4 percent annually should be a national goal. That is a target the economy used to hit with some regularity. During the 1980s and 1990s, there were 35 total quarterly periods when the economy grew 4 percent or faster on an annualized basis. Since then, there have been only eight. Like an aging sprint champion, the U.S. economy finds that peak performances occur with decreasing frequency. And if you listen to economic forecasts—whether from the Federal Reserve, the Congressional Budget Office, or the private sector—the Two Percent Economy is here to stay.
Superficially, the reasons behind the slowdown are straightforward. It’s just simple math. U.S. economic growth, adjusted for inflation, has averaged 3.3 percent over the past five decades. Of that growth rate, roughly half (1.6 percent) has come from a growing labor force, while the other half (1.7 percent) has come from increased productivity. And if the labor force were still growing at that pace and each of America’s workers were becoming more productive as rapidly as they did in the past, the economy would over the longer term grow as fast in the future as in past decades.
But the old math is giving way to a new math. As the Obama White House noted in its 2013 economic report: “In the 21st century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor-force growth initially due to the retirement of the post–World War II baby-boom generation, and later due to a decline in the growth of the working-age population.” According the Bureau of Labor Statistics, the labor force is projected to grow only 0.5 percent per year from 2012 to 2022, compared with an annual growth rate of 0.7 percent from 2002 to 2012. That’s a huge drop-off from the second half of the 20th century.
If the labor force grows more slowly than in the past, that shortfall will need to be made up through higher productivity growth. But we are seeing the opposite. After surging during the mid-1990s through the mid-2000s, productivity growth has decelerated by more than half, averaging just 1.3 percent annually since 2005. And it has been much worse during this recovery and expansion, averaging about 0.5 percent. Taken together, you get an economy capable of growing only 1–2 percent annually on a consistent basis.
Perhaps the most comforting explanation for the post-recession slowdown is that the economy is still suffering from a hangover. The recession of 2008–9 was different from the ones that preceded it during the postwar era. Most of those downturns were spurred by tighter monetary policy from the Federal Reserve, which often acted to cool off an economy in danger of overheating. A too-tight Fed likely played a key role in this downturn, as well. But this one was accompanied and worsened by a financial shock in banking and housing. The economists Carmen Reinhart and Kenneth Rogoff have argued that recoveries tend to be particularly slow after financial-crisis-driven recessions. Things do get better, just not so quickly.
But when, exactly? Let’s say productivity growth eventually rebounds to roughly where it was from the early 1970s through the mid-1990s, rather than the warp-speed productivity surge from 1996 through 2005 when information-technology investment finally started paying big dividends to business.
Combine that with the demographics of a population hitting retirement age and growing more slowly, and according to a recent analysis from the San Francisco Fed economist John Fernald, “GDP growth is likely to be well below historical norms, plausibly in the range of 1 o 1 percent per year with per capita growth of under 0.9 percent.” That is an alarming trend line when you consider that per capita GDP growth has averaged around 2 percent annually for more than a century. And it suggests just how important it will be to speed productivity growth so that output per worker could again be like it was during and just after the Internet boom, or how it was from 1920 through the 1970s—nearly 3 percent annually.
It may be important, but we shouldn’t count on it happening, warns Northwestern University economist Robert Gordon. In his much-discussed book, The Rise and Fall of American Growth, Gordon explains that the period from 1870 through 1970 was a “special century” of fast growth, productivity, and innovation. It was an era of amazing progress and invention from electrification to the combustion engine to running water and public sanitation. And huge advances of that kind are unlikely to happen again. Modern advances just don’t compare, in Gordon’s view. They mostly have been in the narrow sphere of entertainment, information, and communications technology. It is a perspective perhaps best summed up by the motto of venture capitalist Peter Thiel’s firm: “We were promised flying cars, and instead what we got was 140 characters.”
Gordon argues that the 1990s productivity surge was a one-off, and that the “main benefits of digitalization have already occurred”; his conclusion is buttressed by the inability to sustain it beyond the mid-2000s. What’s happening now is a return to something more like the earlier, slower growth era—maybe a bit worse—that began once the massive productivity gains of the “special century” had run their course. Combine that with income inequality, and the economic future will feature only marginal gains for most Americans over their lifetimes, Gordon concludes.
In Gordon’s view, then, all the big, fat, low-hanging fruit of the industrial and post-industrial ages has already been harvested. Future advances will be incremental. The age of miracles has passed. Now it’s the age of the slog. This partially explains the “secular stagnation” that the economist Laurence Summers fears is upon us. With less innovation, there are fewer great new investment opportunities and thus less business investment and slower growth.
All is not lost: Fernald offers an exit from this never-ending new normal when he points out that “raising growth above this modest pace depends primarily on whether the private sector can find new and improved ways of doing business.” This is the voice of optimism, the voice that argues there’s nothing wrong with America that can’t be fixed by what’s right with America. Business dynamism is and has always been America’s deep resource—a world of entrepreneurship and creativity where the economy generates new fast-growing firms that produce new products and services and forces incumbents to innovate or die.
But then there’s this sobering fact: The productivity slowdown has been accompanied by what appears to be a decline in American entrepreneurship. Since the late 1970s, start-ups as a share of all firms have fallen by more than half, while the share of workers employed at new firms has fallen by three-fourths. These distressing numbers recently led the Financial Times to ask “Has America Lost Its Capitalist Mojo?”
A less entrepreneurial economy means a less dynamic economy. Entrepreneurship provides opportunities for employment, upward mobility, and eventually economic security. For many Americans, that is truly where the American dream manifests itself. One of the more interesting moments in the primaries came when the socialist candidate Bernie Sanders complained that banks were stifling capitalist creativity by hoarding the capital small businesses need—capital to start a restaurant or expand one restaurant into three, or to buy dry-cleaning equipment for a store, or to secure office space for a small consulting firm. Republicans complain that the increase of costly and burdensome occupational licensing regulations makes it harder for some small businesses, like hair styling and massage therapy, to get up and running.
But it is more than just that. America is not only a technologically advanced economy; it is an economy that pushes forward the edge of the technological frontier. It is the high-growth startups—Apple, Google, Uber, following in the footsteps of Henry Ford’s assembly lines, Cornelius Vanderbilt’s New York harbor ferries, and even R.H. Macy’s innovative department stores—that really transform the American economy in a deep, structural way, driving innovation, competition, and high-wage job creation. These, too, face difficulties in the form of cronyist regulatory governmental structures that favor incumbent businesses—the war on Uber in places like Austin, Texas, being the foremost recent example. There has been an apparent decline in these high-impact start-ups as well, according to some research.
So if you think America risks permanent stagnation from weak productivity and innovation, then this apparent decline in high-impact entrepreneurship is of paramount importance. But what it the productivity crisis and start-up crises are overblown? There is a compelling case that they are.
Even a quick glance at the business-news headlines would suggest America is generating plenty of fast-growing tech firms. Europe would love to have America’s start-up woes. One study last year found that the cumulative value of all European billion-dollar tech start-ups created since 2000 is around $120 billion. Facebook alone currently has a market capitalization of more than $300 billion. As the venture capitalist Michael Moritz has put it:
Over the past five years the eight most valuable technology companies developed in Europe have assembled a combined market value of around $32 billion. That’s not a figure to be sneezed at any more than the admirable young European technology entrepreneurs who, despite all odds, are more inclined to take a risk than members of their parents’ generation. But EU legislators should be wondering why Europe’s eight most valuable companies are only worth about 10 percent of Facebook or 6 percent of Google.
Contra Gordon, the U.S. is doing something right. More good news comes from the Kaufmann Foundation, which tracks the state of high-impact or “growth” entrepreneurship. Its latest research finds that growth in such entrepreneurial businesses has risen for three straight years and has “largely recovered from its Great Recession slump.”
The data suggest a mixed message: The Great American Slowdown may indeed be a thing. Living standards are growing, but perhaps not as fast as they used to. The Benefits may not be as broadly shared. And growing the economy as fast in the future as in the past will require smarter policy making at all levels.
There is a clear disconnect between economic growth and the job market, which is a bit of a conundrum in the economics world. One reason Goldman thinks the job market is a more informative way of gauging the economy is that it thinks official GDP and productivity numbers miss a lot of economic activity. Perhaps metrics devised for America’s 1930s “steel-and-wheat” economy, in the words of economic historian Joel Mokyr, are inadequate for one in which information technology and communications are of growing importance.
There are two serious measurement problems here, according to Goldman. First, government statisticians might be missing productivity advances in software ranging from inventory-management systems to video games such as Grand Theft Auto. Second, even though free digital content and products—from Google maps and searches to social networks such as Facebook and Twitter—provide real value to consumers, their positive impact is hard to figure into GDP. As the bank’s economic team recently wrote in a research note: “The combined equity market capitalization of Alphabet/Google and Facebook alone has grown to $900 billion, nearly 5 percent of the S&P 500. There is something rather unsatisfactory about effectively excluding the output of some of the U.S. economy’s most successful firms from the U.S. government’s highest-profile measure of economic activity.”
Adding it all up, Goldman thinks real GDP growth may be anywhere from 0.4 to 0.7 percentage points higher than the story told by the official numbers. So maybe we actually have something closer to a Three Percent Economy than a Two Percent Economy. “Our results imply the true pace of increase in living standards may not have weakened as much as suggested by the sharp slowdown” in the official productivity and inflation data, Goldman notes.
The idea that GDP and income numbers tell only a partial story is widely, though not universally, accepted. A 2015 University of Chicago Business School survey of top economists found that 70 percent agreed or strongly agreed that official numbers “substantially” understate how much better off the median American household is today versus 1980.
The data suggest a mixed message: The Great American Slowdown may indeed be a thing. Living standards are growing, but perhaps not as fast as they used to. The benefits of growth may not be as broadly shared. And growing the economy as fast in the future as in the past will require smarter policymaking at all levels.
Yet even if there are systemic reasons that faster growth and rapidly rising incomes will be harder to achieve in this century than in the last one, we are hardly powerless. Even believing the bearish economic case doesn’t require surrender to stagnation. There are numerous self-inflicted errors we can reverse. And even if the economy is somewhat or a lot better than we think, there is considerable room for improvement. Policymakers would do well to assume stagnation is upon us, because it will force them to push hard for acceleration.
Gordon, for one, suggests corporate tax reform as one possible way to boost business investment and productivity. The Nobel laureate Edmund Phelps worries that American intellectual-property law has devolved into a cronyist protection scheme for big business that stifles competition and innovation. In his recent book, Mass Flourishing, Phelps writes that “the economy is clogged with patents.” For his part, the Fed’s Fernald thinks that “policies to improve education and life-long learning can help raise labor quality and, thereby, labor productivity.”
On the state level, there’s been growing attention to how non-compete agreements—signed by nearly a fifth of American workers, thus exposing them to litigation should they attempt to change jobs—damage wage growth and crush innovation. Indeed, researchers think one reason behind Silicon Valley’s success is that California doesn’t enforce such contracts.
Some economists are focusing more on how excessive or unnecessary land-use or zoning regulations damage growth and worker mobility by making housing more expensive in high-productivity cities such as Boston and San Francisco. Reform in all these areas would be a welcome effort in boosting productivity.
Then there is the labor-force aspect of economic growth. While there are demographic reasons behind the decline in labor-force participation—the decline in work among prime-age males is particularly worrisome—policymakers aren’t without options. Among possible reforms: making work more attractive by expanding earning subsidies such as the Earned Income Tax Credit; reforming the Social Security Disability Insurance program so it encourages reentry into the job market; expanding work-based learning programs such as apprenticeships; and tweaking Social Security so that older workers stay in the workforce longer.
The above list of ideas is hardly complete. But there is good reason to think a pro-innovation, pro-work policy agenda could result in an economy capable of reversing its 2000s slowdown and again growing as it did in the late-20th century. Of course, “things are better than you think” is not a sound political message; people feel what they feel, and they won’t be talked out of what they feel by pundits. And promising that things can be somewhat improved through incremental policy changes is about as unsatisfying a guarantee as one can imagine a politician making. But the truth is the truth, satisfying or not.
