Fiscal policy U. S.

Growth headwinds

The slow growth since the Great Recession prompted many people to explore the answers. In my previous note, I pointed out that the Great Recession had damaged the demand side of the economy which is characterized this time by high debt owned by the consumers and government of some major economic nations. The debt de-leveraging will take time, and it is different from repairing the supply side, where the monetary and government stimulus could take less and definitive time to help heal.

I was reading “The rise and fall of American growth” by Robert Gordon these days. Interestingly Gordon provided deeper and more complete answers. He examined the American growth since 1870 and pointed out that the American growth was actually slowed since 1970. He attributed the slower growth to four main headwinds.

First is the rising inequality. The average income of the top ten percent has more than doubled while the bottom ninety percent has little changed since 1970. The new economy in the digital age has made it easy for in individuals to initiate innovations, start companies and take the businesses to large scales. While before 1970 where the industrializations were born in support by government or by large corporations, and they were labor intensive and the benefits of economic growth were shared by large populations.

Education is a growing source of inequalities. Since 1970, the income for those with university degrees have increased by more than 50%, while the minimum wages have actually decreased after inflation adjustment. The challenges in the education in the U. S. are compounded by high education costs and high student debt (~ 1.5 trillium dollars).

The third headwind is aging populations. Baby boomers are retiring or many have dropped out of work forces during the Great Recession. This is proved by lower labor participation rate than the pre-recession level.

Repaying high debt is the fourth headwind. “The future reckoning for government finance will arrive over the next several decades. The official projections of the Congressional Budge Office currently estimate that the federal ratio of debt to GDP will …. rise steadily to 100 percent by 2038.” High government debt will limit the ability of government fiscal stimulus in the future recessions, and will also limit the central banks from normalizing interest rate policies.


Robert Gordon, the rise and fall of American growth.

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