Blame the Overweight Jockey

The longest economic recovery on record continues, with January being the 128th consecutive month of growth. The first seven years, from mid-2009 through 2016 saw average real GDP growth of 2.2%. Since the start of 2017, US real GDP growth accelerated, to an average annual growth rate of 2.6%, while the unemployment rate now stands at the lowest level in 50 years (and is likely headed lower).

We attribute the acceleration to a combination of better regulatory policy and lower tax rates. These changes reduced impediments to growth, kind of like putting a lighter jockey on the horse. Steps forward for sure, but it could be better. The US grew at a 3.1% annual rate during the 1980s and a 3.4% rate in 1990s, both decades that saw recessions.

What gives? The US has not grown more than 3.0% for any calendar year (Q4/Q4) since 2005. Larry Summers, former Treasury Secretary, former head of the National Economic Council, and a possible Fed chief if the Democrats take the White House, says it's "secular stagnation." Summers thinks the US and other economies are in a long-term funk because of slower population growth, more inequality and low investment – which in economic terms means a shortage of demand.

The best way to address this, according to the secular stagnationistas, is to keep monetary policy loose and run large budget deficits. So, Summers was OK with the Fed's cuts in short-term interest rates in 2019, and, although he opposed the Trump tax cuts, he has not loudly opposed budget deficits. Those who claim we're in secular stagnation support more government spending on things like infrastructure, for example.

To sum it all up, secular stagnation theory means we should inject the economic horse with government-provided steroids.

An alternate theory comes from economists Carmen Reinhart and Kenneth Rogoff, who, in their book "This Time is Different," argue that, after financial crises (such as 2008-09), economies grow slower. But here we are 11 years later, with consumer and corporate balance sheets in much better shape, and inflation and growth have still not returned to normal. The economic effects of the financial crisis should be past us by now.

We never believed this theory and to see it fail isn't a surprise. After all, the S&L crisis, Latin and South American debt defaults, and oil and ag bank problems, hit in the 1980s. In fact, adding up all the losses (and bank failures) from that period shows it to be worse than the 2008 crisis. But Reinhart and Rogoff ignored it because it didn't fit their theory – the economy grew rapidly in the 1980s.