Secular Stagnation or the Pause that Refreshes?....

For most of the last five years, economists have been scratching their heads trying to understand the causes behind the nation’s frustratingly slow recovery. High levels of indebtedness, the weak housing sector and political uncertainty have all been blamed. Increasingly, the notion that we may have entered a permanent slowdown is taking hold. While the debate may seem academic it is anything but. How fast the economy grows will influence everything from interest rates to living standards in the years ahead.

Economies are complex machines and, as a result, predicting growth rates is no easy task. But at the simplest level, economies grow for only two reasons. First they produce more by adding more workers, generally the result of higher birth rates or immigration. Second, their citizens become more productive. Higher levels of productivity typically result from investment in training, infrastructure or technology.

Between 1870 and 2007, the U.S. economy increased productivity approximately 2% each year (see chart below). But since then, with one exception between 1996 and 2004, productivity gains have slowed to a 1.3% pace. While this may not seem like that big a drop, consider that 2% annual productivity gains mean that standards of living double approximately every 35 years. When that rate drops to 1.3%, it takes over 70 years to see incomes double.

US GDP per person

Robert Gordon, a prominent economist at Northwestern, believes that productivity growth in the U.S. is likely to remain muted in the years ahead. While he does think that further technological advancements are possible, their economic impact is likely to be more muted. Twitter, for example, is unlikely to fuel the kind of changes in life-style that electrification, the telephone or running water did in the past. The low-hanging fruit, in other words, has already been picked.

The opposing camp, led by fellow Northwestern professor Joel Mokyr, sees the more recent slowdown as simply one of many ebbs in the long history of technological progress. Productivity gains, he argues, come in fits and starts. 

Output per hour

Regardless of which side you come down on in the productivity debate, the U.S. economy, and in fact much of the developed world, is likely to face some serious headwinds. According to the U.S. Census bureau, in 2013 population growth slowed to just 0.7% - the slowest rate since the Great Depression. As recently as the 1990s, the U.S. population was growing at a 1.2% rate. An older population means fewer hours working and lower rates of economic growth.

But reasons for optimism exist as well. MIT professor Erik Brynjolfsson points to the stimulative impact of innovations such as big data and robotics. Higher rates of education in places like India and China means growing ranks of researchers ready to feed ideas to populations in search of improved standards of living. The U.S. should ultimately benefit from this trend just as the roll-out of electrification in the U.S. in the late 1880s sped its global adoption over the next several decades.

Future productivity gains in the U.S. are likely but not guaranteed. Excessive government regulation, a weakening of property rights or stagnating levels of educational attainment could indeed set it off course. Fostering an environment where innovation thrives and where both the benefits and costs of such innovations are considered will be a central public policy challenge moving forward.