It is an alarming, jaw-dropping conclusion. The U.S. standard of living, says superstar Northwestern University economist Robert Gordon in a new paper, is about to experience its slowest growth “over any two-decade interval recorded since the inauguration of George Washington.” That’s right, get ready for twenty years of major-league economic suckage. It is an event that would change America’s material expectations, self-identity and political landscape. Change in the worst way.
Now it’s not so much that the Great Recession will morph into the Long Recession. More like ease into the Great Stagnation. As Gordon calculates it, the economy will average only 2.4 percent annual real GDP growth over that span vs. 3 percent or so during the previous 20 years. On a per capita basis, the economy will grow at just a 1.5 percent average annual rate vs. 2.17 percent between 1929 and 2007.
That might not seem like much of a difference, but it really is. Over time, the power of compounding would create a huge growth gap measured in the trillions of dollars. To look at it another way, assume you had an annual salary of $100,000. If you received a 1.5 percent raise each year, you would be making $134,000 after 20 years, $153,000 after 40 years. But a 2.17 annual raise would boost your income to $153,000 after 20 years and $236,000 after 40 years.
For Gordon, the culprit is weaker productivity. Productivity, economists like to say, isn’t everything — but in the long run it is almost everything. A nation’s GDP growth is little more than a derivative of how many workers the nation has and how much they produce. And if Gordon is correct, U.S. productivity is about to weaken. He forecasts that over the next two decades, the metric will grow at just a 1.7 percent annual rate. From 1996-2007, economy-wide productivity averaged just over 2 percent with GDP growing at 3.1 percent.
Gordon’s argument is simple: The productivity surge starting in the 1990s was driven primarily by the Internet, though drastic corporate cost-cutting in the early 2000s helped, too. Going forward, though, Gordon thinks the IT revolution will be marked by diminishing returns. He concludes, for instance, that most of the product innovations since 2000, like flat screen TVs and iPods, have been directed at consumer enjoyment rather than business productivity. (Also not helping are a more protectionist trade policy and a tax code where the penalties on savings and investment are about to skyrocket with rates soaring 60 percent on capital gains and 200 percent on dividends.)
All this dovetails nicely with research showing financial crises are followed by negative, long-term side-effects such as slow economic growth and higher interest rates. Lots of debt, too. Indeed, researchers Carmen Reinhart and Kenneth Rogoff find advanced economies with debt-to-GDP ratios above 90 percent grow more slowly than less-indebted ones. (Japan is the classic example.) America is on track to hit that level in 2020, according to the Congressional Budget Office.
But maybe Gordon is wrong. Productivity has been surprisingly robust during the downturn, helping the overall economy (though not the labor market) weather the storm better than most expected. Maybe nanotechnology or genetic engineering will be the next Internet and ignite further creative destruction. Yet even if Gordon is correct, Americans still control their own economic destiny.
Since the 2008 election, American economic policy has been about wealth preservation (keeping the economy from sliding into a depression) and wealth redistribution (healthcare reform.) Wealth creation? Not so much. That needs to change. Washington needs to focus on growing the economy and competing with the rest of the G20 nations, including the other member of the G2, China. Every policy — from education to trade to the tax code — needs to be seen through that lens.
America faced a similar turning point a generation ago. During the Jimmy Carter years, the Malthusian, Limits to Growth crowd argued that natural-resource constraints meant Americans would have to lower their economic expectations and accept economic stagnation — or worse. Carter more or less accepted an end to American Exceptionalism, but the 1980 presidential election showed few of his countrymen did. They chose growth economics and the economy grew.
Now they face another choice. Preserve wealth, redistribute wealth or create wealth. Hopefully, President Barack Obama will choose door #3. Investing more in basic research (not just healthcare) would be a start, as would slashing the corporate tax rate. A new consumption tax would be better for growth, but only if it replaced the current wage and investment income taxes. Real entitlement reform would help avoid the Reinhart-Rogoff scenario. The choices made during the next few years could the difference between America in Decline or the American (21st) Century.
“Hopefully, President Barack Obama will choose door #3.”
Oh, god, thanks for the laugh.
Well done, James. You initial report on this topic was far too acquiescent as regards the forecasts of Mr. Gordon. Drawing on history – and especially the foolish Jimmy Carter – is a good counter-argument. I’ll take door #3 please. Or should I say: Economic growth for $1000 please, Alex.
[...] } A Reuters blogger, James Pethokoukis, claims that the United States is about to enter into a 20-year period of slow growth. He cites as evidence [...]
Just a note – in the early 90’s, every economist was saying exactly what Gordon is saying: Productivity was going to slow and hence economic growth. Of course productivity actually grew and we became a much more prosperous society. My point is that these things are very difficult to predict. One thing that is not difficult to predict is the effect of the current administration’s policies on growth and productivity all else equal. It’s not a pretty picture.
Barack Obama? Former community organizer and current crypto-Marxist? Can’t you guess what he is likely to choose?
Actually, at a 1.5% growth rate, it would be more like $181,000 after 40 years
Obama is the ultimate culture test. Is there a western culture? Is there an American culture and does it matter if you select as our leader a man who rejects both?
According to the left there are no consequences as long as your intentions are good. I would suggest that intentions don’t matter, only results do.
I wonder if conservatives can recover from this. For us here in Europe it always was a great comfort to know there was a country where common sense and self reliance ruled. But it was clear you could not resist the temptations of politically correctness and wishful thinking for ever.
I have no doubt you will attempt to recover, but I fear it will be nothing but a long drawn out goodbye.
“Productivity has been surprisingly robust during the downturn, helping the overall economy (though not the labor market.”
Productivity is up BECAUSE of the disastrous labor market. By increasing the worker/production ratio, each worker fired increases productivity.
However, increased productivity should have raised hiring by now, as it has in every other recession long before this point. The problem? Insanely high government spending is hoovering up our seed money, and banks and business, which have to plan for the future, are terrified to expand. In the case of business, where is the rising economy that will buy more production? Or take risks, as in the case of the banks, who have a sweet guaranteed profit from the Fed right now and can see the flaccid economic growth as clearly as anyone else, except Harry Waxman. (Yes I know I’m simplifying greatly, but this is the gist of it.)
Why you think Obama is going to choose to create wealth is a mystery. He’s been pretty honest throughout the campaign and right to the present that he is uninterested, and indeed opposed to, strong wealth creation. When I read an article like yours: concise, informative, clear, and well-researched, I’m always bowled over by the fantasy ending where Obama turns into some other person, Bill Clinton or Bush I, a centrist who just needs a little nudge to change course and make the right decision.
He’s doing exactly what he said he would do his entire public life: shrink the American economy by reducing consumption; drain economic vitality by transforming the major industrial sectors into a relatively few very large private-public-union players, as, for example, the health bill does to Medical Insurance and Pharmaceuticals; shrink the small business sector, especially of any potential status quo up-turners, which could diminish the power of government and the status quo; and regulate the labor market by enforced unionization and hurdles to hiring.
Don’t get me wrong; in big speeches to large audiences in major venues, he’s happy to lie and say the opposite, but these lies have always been such a transparent contradiction to everything else he says and does, so obviously false, that they can hardly be considered as lies.
His statement supporting off-shore drilling is interesting. Since it would lower energy prices, increase employment, and be a boon to small business, I look forward to the qualifications of the coming days: areas that can’t be drilled in; environmental regulations that hamstring drilling; tying it to passage of cap-and-trade; and who knows what else.
I’d love to be wrong about that last paragraph, but I won’t be.
The US should take all 3 doors,
You have a great leader, in my liftime Clintion was intellectually impressive, he just got blown off, its all about perception…
Great Canadian movie: ‘The Decline of the American Empire’,
sequel:
‘The Barbarian Invasions’.
be careful, you might get what you wish for.
“Productivity” inherently frees resources for other use, but if the regulators insist preventing the process (see Big Labor’s grip) or skimming any gains (see tax codes, cap-and-trade) then there is no point to seeking productivity.
Well it’s nice to know there’s more than one minaret atop the ivory tower from which theism of the Invisible Hand is preached. From up there, pundits see this as a game between America and Other Places. From street level, it’s more like a gladiator match about domestic survival, one that fewer and fewer people believe will end well. Meanwhile, Other Places have America licked hands down.
Too bad those at the top, having overindulged in Reagan Juice have gone on gaily building their fictitious economy skyward by pulling essential materials from the foundation. The U.S. economy is now polarized and unstable.
There may be just time enough to open Door #2 before the whole thing comes tumbling down. Then again, there may not.
So what’s the difference between this prediction and the work of the ‘Malthusian Limits to Growth’ crowd’s predictions in the 70’s? Are you proposing that they got it wrong but you’ve got it right now? It’s just a matter of continuing to purse (discredited) supply side economic theory to avoid the (now) inevitable decline of America?
Baloney. Superstar economists have proven themselves unreliable and minor pundits should find better shoulders to stand on.
Are we going to be expected to blame Bush for the next 20 years of increased debt and deficit spending too?
Or will we eventually maybe find that it’s possible to blame the people doing the spending now as well that those who did the spending previously?
Wait, it’s probably racist to ask that question isn’t it?
So is this INCLUDING the massive spending or is this the RESULT of the massive spending planned? Because I’ve got a feeling it’s going to actually be anywhere from 10-100x worse than presented here.
Actually, the better scenario is door number 4. Americans choose somebody diametrically opposed the Obama.
Obama, wanting to ‘be fair’, will choose door #3. “The Professor” majored in ’social issues’, not economics. It’s all about THE RICH and how they SCREW the poor. Mama said so.
[...] U.S. Economy entering 20-year recession?? (Not all Obama) [...]
1. Obama is purposely destroying business, jobs, and the economy.
2. He has spent at 5 times the rate of Bush who was also terrible. So anybody whining about that is an idiot.
2. Every single one of our liabilities are unfunded and some are even bankrupt…
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