Room to Grow

The US economy has grown at an average annual rate of only 2.1% since the recovery started in mid-2009, far slower than during the economic expansions of the 1980s and 1990s.

Many analysts tie some of the slower growth to slower expansion in the labor force due to retiring Boomers and the end of the shift of women into the paid job market. But productivity (output per hour) has been slow as well. Since mid-2009, productivity is up at a 1.0% annual rate versus a pace of 2.1% at the same point in the recoveries after the 1981-82 recession and 1990-91 recession. The expansion in 2001-07 lasted six years during which productivity grew 2.5% per year.

In other words, if productivity growth had been just as fast in the current expansion as in the expansions of the 80s and 90s, real GDP growth would have been averaging around 3.2% per year, not 2.1%. In that case, much of the current angst about the US economy would be gone.

Two popular theories try to explain why productivity growth has been so slow.

One is the "Great Stagnation" theory made famous by economist Robert Gordon, among others. Gordon believes humanity – usually, but not always, led by the US – made massive leaps in technological progress and implementation between 1870 and 1970: incandescent light bulbs, automobiles, central heating, refrigerators, the germ theory of disease, window screens, radios, telephones, television, air conditioners, airplanes, sewer systems, and indoor plumbing.

Gordon says those kinds of achievements, directly addressing problems humans have wanted to address since the beginning of time, simply can't be duplicated again, and so we're simply going to have to learn to live with slower economic growth. In turn, he proposes government policies that focus on redistributing income to lower earners.