Is the U.S. Economy in Slow Gear Forever?

September 8, 2015

In a guest post, Gregory Tassey of the University of Washington’s Economic Policy Research Center writes that complaints about the sluggish recovery from the Great Recession are rampant and for good reason. It is by far the slowest of the recoveries from the nine recessions since WWII. Productivity and job growth have been anemic, while median inflation-adjusted household income is down. Such extended malaise should indicate a longer-term structural problem within the economy. Instead, the problem is being treated as an extreme business cycle phenomenon. Thus, the major policy response has been monetary stimulus, which has been invoked at unprecedented levels with the result of near zero short-term interest rates for the past six years. The other business cycle stabilization tool, fiscal policy, has been missing in action. Republicans blame excessive government spending for low growth rates, arguing that it interferes with the private sector’s investment decisions. Under such pressure, the federal budget deficit has fallen substantially, but with no apparent effect on the rate of growth. For their part, the Democrats have focused on income redistribution, supporting initiatives such as raising the minimum wage, expanding the maximum income level eligible for overtime pay, and adjusting the tax code to deal with growing income inequality. Whether or not such changes have merit in a social welfare sense, they are not going to solve the core growth problem. For an economy of our size, current levels of investment are too little and too concentrated to yield the overall productivity growth needed to raise the standard of living going forward