Economic growth is a wondrous potion. It encourages lending because borrowers can repay debts from rising incomes. It supports bigger government because a growing economy expands the tax base and makes modest deficits bearable. Despite recessions, it buoys public optimism because people are getting ahead. The presumption of strong economic growth supported the spirit and organizational structures of postwar America.
Everyday life was transformed. Credit cards, home equity loans,
30-year mortgages, student loans and long-term auto loans (more than 2
years) became common. In 1955, household debt was 49 percent
of Americans’ disposable income; by 2007, it was 137 percent.
Government moved from the military-industrial complex to the welfare
state. In 1955, defense spending was 62 percent of federal outlays,
and spending on “human resources” (the welfare state) was 22 percent.
By 2012, the figures were reversed; welfare was 66 percent, defense 19
percent. Medicare, Medicaid, food stamps, Pell grants and Social Security’s disability program are all postwar creations.
Slow
economic growth now imperils this postwar order. Credit standards have
tightened, and more Americans are leery of borrowing. Government
spending — boosted by an aging population eligible for Social Security
and Medicare — has outrun our willingness to be taxed. The mismatch is
the basic cause of “structural” budget deficits and, by extension,
today’s strife over the debt ceiling and the government “shutdown.”
The
temptation is to think that stronger economic growth will ultimately
rescue us and make choices easier. This is economic growth’s appeal. It
provides the extra income to buy more of what we want. We explain the
weak economy as the hangover from the financial crisis and the Great
Recession. Their legacy of caution and pessimism will, with time,
dissipate. The economy will strengthen. This is plausible.
But
it’s equally plausible that slow growth will persist. We rebel at the
notion. As economist Stephen D. King writes in his book “When the Money Runs Out: The End of Western Affluence”:
“Our
societies are not geared for a world of very low growth. Our attachment
to the Enlightenment idea of ongoing progress — a reflection of
persistent postwar economic success — has left us with little knowledge
or understanding of worlds in which rising prosperity is no longer
guaranteed.”
His glum outlook is more than idle speculation. In a recent column, I noted that annual U.S. economic growth
has averaged slightly more than 3 percent since 1950, but predictions
of future growth cluster around 2 percent. Significantly, the forecast
slowdown reflects factors that are only weakly related, if at all, to
the recession, as Cato Institute economist Brink Lindsey shows in a new study.
Lindsey
attributes U.S. economic growth to four factors: (a) greater
labor-force participation, mainly by women; (b) better-educated workers,
as reflected in increased high-school and college graduation rates; (c)
more invested capital per worker (that’s machines and computers); and
(d) technological and organizational innovation. The trouble, he writes,
is that “all growth components have fallen off simultaneously.”
Take
women’s labor-force participation. From 1950 to 2000, it surged from
30.9 percent to 59.9 percent; but in 2012, it was 57.7 percent, with the
falloff starting before the recession. Some older women are retiring;
some younger women are staying home. High school and college graduation
rates have leveled off and, in some cases, declined. Business investment
rates have also dropped. It seems that “only a surge in [innovation]
can keep U.S. economic growth from faltering,” writes Lindsey. But
innovation, too, has weakened.
Admittedly, predictions like these
aren’t infallible. Growth could exceed expectations. Still, slow growth
is more than scare talk. When adjusted for population increases, it
reduces per capita income gains to a rough range between 1 percent and
1.5 percent annually, Lindsey calculates. That’s half to three-quarters
the historical rate. The increases would be small enough to be skimmed
off by rising taxes, higher health-insurance premiums or growing
inequality. For many households, it would mean stagnation or worse.
What
looms — it’s already occurred in Europe — is a more contentious future.
Economic growth serves as social glue that neutralizes other
differences. Without it, economic and political competition becomes a
game of musical chairs, where “one person’s gain is another’s loss,”
King writes. There’s a “breakdown of trust,” as expectations are
continually disappointed. It’s an often-ugly process that is
convincingly confirmed by Washington’s current political firestorm.
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