The Economy

In spite of multiple recessions and depressions, the US has maintained a long-term annualized economic growth rate of 3.5% for almost a century and a half.   This was real growth, after allowing for inflation, and it included booms when growth was much higher and recessions and depressions when the economy shrank substantially.  Now, however, as the effects of the Great Recession have lingered and the economy has slowly started to grow again, there has been a discussion in the media of a “new normal” – of an economy that will never again grow at a long-term average rate much higher than 2%, having hit a plateau similar to the one Japan hit in the 1990s (just not quite as bad).

The 21st century (so far) has been a mix of good and bad for the American economy.  The 2000s started with a business slowdown (almost, but not quite, a recession) beginning with the tech stock crash in 2000.  This was followed by 9/11, which was a dark day for the country’s economy as well as for the nation as a whole.  After recovering from that dip, the US began to grow in 2003 at a breakneck pace.  Unfortunately, much of that growth was built on the foundation of the housing market, which was itself growing so fast only because of financial wizardry – complex and arcane financial products that inflated the housing market into a bubble, creating fantastic profits for those who invested in it but ultimately collapsing after it grew too large.  The collapse of the housing market in 2007, and of the banks that depended on the financial products it supported in 2008, caused a massive world-wide recession.

After shrinking by 3.1% in 2009, our economy has been growing (“recovering”) in fits and starts at rates that are not at all what we’re used to: 2.4% in 2010, 1.8% in 2011, and 2.2% in 2012.  The two to four years after a recession are supposed to be a period of rapid recovery and robust growth (see figure below).  If the anemic recovery after the Great Recession is any example of what future recoveries will be like, we may be in for a trend of considerably lower “normal” economic growth in the coming decades, which would result in a great deal of economic and social pain.  If it continues for more than a decade, it will almost certainly cost us our position as the world’s economic leader.

CAP recovery gdp graphsource: Center for American Progress

Of course, no one knows for sure whether this trend will continue, but the worries about it certainly seem to have a kernel of truth to them.  One question I would pose to the reader is this:  If weak growth really is a “new normal,” what’s causing it?  Is it a shift in technology and a move towards a more globalized world?  Is it a structural change in the way the US economy works?  Or, as I believe, has it been caused by the build-up of many different drags on the economy, which have combined to bring us down from our previously high growth rate?

 

Part 1:  Fundamentals of economic growth

Part 2:  Stages of economic growth

Part 3:  The economy in the Interlock

Part 4:  Interactions – the Economy

 

Further reading for the Economy

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