In the French comic book series Asterix, the hero bravely fights the Roman Empire together with the people in his little village. To make it harder for the Romans to attack them, the village druid asks Asterix and his friend Obelix to plant trees around the village. The seeds they plant are magic: a full-size tree grows out of the ground in seconds. Asterix is very impressed, but his friend Obelix just shrugs his shoulders, saying “I have never seen a tree grow before, so I don’t know what is normal for them.”
Some changes to our environment, or our economy, are just too slow to be seen with the naked eye. A good example is the long-term decline in economic growth. This hugely important and troubling trend is rarely if ever discussed in the public political debate.
Perhaps this is understandable in the same way that we can understand Obelix when he says he has never seen a tree grow before. It is easy for politicians and policy experts to get stuck on what is going on “here and now”, and forget the long-term perspective.
Yet that long-term perspective is precisely what we need to focus on.
Here is why. In the 1950s and 1960s the American economy grew at an average of more than four percent per year (adjusted for inflation): 4.3 percent in the ‘50s and 4.5 percent in the ‘60s. Then we had three decades, 1970-2000, when GDP grew at 3.2-3.3 percent per year. The first decade of the new millennium was particularly bad, averaging only 1.8 percent per year.
Halfway through the 2010s, GDP is ho-humming along at 2.2-2.3 percent. Nothing on the horizon gives us any hopes for higher growth.
There are things we can do to get back to higher growth rates, but first, let us look at what this decline in growth actually means.
First, consumers have less money to spend. Household spending is now growing at half the rate at which it increased in the 1960s. This means that America’s families are still able to spend a little bit more every year (again adjusted for inflation), but they are far from actually advancing their standard of living. According to something called Okun’s Law (for econ nerds, my book Industrial Poverty explains its application to private consumption) consumers need to be able to increase their spending by more than two percent per year to actually raise their standard of living.
If not, we just replace the standard we have now: we do not trade in our Corolla for a new Camry, but a new Corolla; every year we go on vacation we stay at the same low-budget motels; when we eat out, we go to the same burger joint as before; etc.
Put bluntly: the slowdown in growth is trapping America’s families in a stagnant standard of living.
The second consequence of the growth slowdown is that our economy does not create as many jobs as before. Roughly speaking and calculated over a long-term perspective, one percent growth equals 1-1.2 million new jobs. By growing at two percent instead of four percent, over time our economy loses out on millions of new jobs. These are jobs that could have given high school and college graduates a great start on adult life.
So what is behind this long-term decline in growth? The most compelling long-term trend, parallel to our decline in growth, is the steady increase in government spending that is not paid for with current tax revenues.
In other words, the federal budget deficit. In the 1950s the budget went from deficit to surplus over a business cycle. Since the mid-1960s, however, we have had a deficit almost every year (a notable exception was the second Clinton presidential term). Forecasts point to trillion-dollar deficits for years to come.
Over time more and more of every percent of GDP growth is used fund the deficit. That means less and less of whatever growth we have goes toward improving our standard of living. The so-called productive content of GDP growth is gradually hollowed out.
We can return America to three, even four percent growth. We can absolutely restore an economy that will allow every new generation to build more prosperity than their parents did. But we need major reforms to get there, and we definitely need to start with eliminating the chronic deficits in the federal budget.
Sven Larson, Ph.D., is an economist and Member of the Council of Scholars of Compact for America. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe.