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Is America destined for slow growth?

Is America destined for slow growth?

Posted by Liliana Castaño on August 21, 2014

If you ask an American how the economy is doing, chances are she’ll tell you, “not so hot.”

Despite the fact that economic growth has been accelerating and the unemployment rate has been falling, much of the country simply feels that the U.S. economy is on the wrong track. There are many reasons for this, but likely no greater reason than the simple fact that most of us haven’t seen a raise in a long, long time.

But it’s not just that folks’ personal situations aren’t improving. Compared to previous recoveries, economic performance today has been anemic, as shown by the chart below from the Center for American Progress.

 

 

This discrepancy was perhaps the single most debated issue during the 2012 presidential campaign, as critics of President Obama blasted him for presiding over the worst economic recovery in more than half a century. The President countered that the economy’s poor performance was attributable to the fact that we had just suffered through a financial crisis of epic proportions, and that economies tend to perform worse following financial crises.

Academic studies have shown that this is the case, and if President Obama’s reelection is any indication, the American public bought the story. But a small but growing number of economists are putting forward the idea that our economic history is wrong. It is commonly supposed that the past 15 years has been dominated by two recessions–2001 and 2008/2009–with average, or even pretty good, performance in between.

But what if that narrative is just an illusion? What if we’ve really been suffering from a 15-year malaise brought on by more powerful forces that even those that caused the financial crisis? That’s the basic premise of a new theory called “secular stagnation” that’s been argued by economists of no lesser stature than former Treasury Secretary Larry Summers. In a new ebook published Friday by the Centre for Economic Policy Research on the concept, Summers and fellow economic luminaries like Paul Krugman, Barry Eichengreen, and Richard Koo explore the idea that the economy moved into an era of slower growth long ago. This was brought on by an aging wealthy world, slowing technology growth, and growing income inequality.

How has the world evolved to be less hospitable to economic growth? One reason is the fact that the wealthy world is much older today than in any time in modern economic history. Advances in medicine have allowed people, especially in the developed world, to live longer. This has lead for a much greater need to save rather than spend, as older folks tend to live off their savings than income. The authors of the book point out, for example, that the required amount of money for saving in Germany “rose from almost two times GDP in 1970 to three and a quarter times GDP in 2010.” Similar trends are happening across the wealthy world, creating a lot of demand for safe assets like U.S. government debt and pushing down interest rates over time.

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