Economists of all political persuasions continue to wring their hands in despair about the weak economy. Historically, recessions are supposed to give way to robust expansions. As a rule, the deeper the recession, the more robust the recovery. The Great Recession we just went through was the deepest of all, so conventional wisdom says we should be in the midst of an economic boom.
The reality of course is that we are adrift in an anemic recovery characterized by 2 percent growth and stubbornly high unemployment, and it just keeps on keeping on with no end in sight. (The third quarter came in at 2.8 percent, but almost a point of that was inventory expansion, and it is still well below the annual growth of about 3.5 percent we have had since WWII, even factoring in occasional recessions.) This is new. So what gives?
The answer according to some economists is a new economic reality -- anemic growth as far as the eye can see. In the October 28 Barron's, Jonathan R. Laing, distilling wisdom from a diverse population of economists, contends we are embarked upon a new slow-growth era which is the natural result of weak growth in population and declining gains in productivity.
The connection between demographics and productivity growth and economic growth is well understood. A growing population means growing demand, at least if the people are gainfully employed. Productivity growth means more wealth is being produced at less cost. The result is economic growth.
But our population has been leveling off, like that in most of the advanced nations, because prosperity leads to smaller families. And productivity gains are likewise in the tank, in part because of declining investment in R&D. In the last three years, nonfarm productivity has increased at a historically weak 0.7 percent annual rate.
Laing contends, and I believe rightly, that weak growth will lead to bad things -- a deepening divide between rich and poor, unsustainable pressure on entitlement programs, and increased political polarization. All really bad stuff.
I appreciate this analysis and am concerned about it, but I am perhaps not as pessimistic as Laing and the others he cites in his article. Our demographic situation is not nearly as bad as in many other advanced nations. We have had, at least until recently, a strong tide of immigration that adds to our population. We need major immigration reform, particularly that which increases the influx of skilled workers. And for a variety of reasons, not all of them economic, a growing number of working Americans are staying in the work force well beyond standard retirement age.
Also, I do not believe the slump in productivity is permanent. Technology is racing ahead on several fronts. Our manufacturing, already in the vanguard of innovation, is on the cusp of major new breakthroughs. In the next few years, we will see huge strides in productivity. Even so, the new consensus of an era of slow growth -- if it really is a consensus -- is sobering. We should all be demanding that Washington move on immigration reform, major investments in R&D and advanced manufacturing initiatives that have bipartisan support.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. You may quote from this with attribution. Let me know if you would like to speak with Jerry. November 2013