This week marks the release of Ball State Center for Business and Economic Research’s annual economic forecast. Like most other projections of the national and state economy, we predict slower growth in the coming year.
Also, like other forecasts, our 2015 estimates were too optimistic, as they have been in virtually every forecast since 2010. So, the slower growth in 2016 reflects the hysteresis effect of continued slow growth in the wake of the Great Recession. It might be called the Great Stagnation, and why this might be dominates macroeconomic research these days.
There are two competing explanations for economic stagnation. One argues that technology and human capital impacts to productivity have slowed. The other contends that there is a chronic excess supply of savings due to a variety of factors about which there is not broad agreement.
The gist of the technology argument by Tyler Cowen and Robert Gordon is that nearly 200 years of remarkable technological changes combined with new infusions of human capital gave us growth that doubled the standard of living of almost every generation from the Civil War era through the Civil Rights era 100 years later.
The technology changes were large and discrete impacts: railroads, electricity, automobiles. These innovations required a lengthy period to broadly diffuse, but once they were ubiquitous, they offered no additional growth. No new innovation, including computers, has made such substantial changes to productivity for a generation.
The human capital changes comprise broad immigration at the end of the 19th century, universal education in the first half of the 20th century and women entering the workforce in large numbers since the 1950s. Today, our human capital improvements have stalled. High school graduation rates are no better than they were in 1970 and nearly all increases in college graduates have come in the disciplines farthest removed from science, commercial and technically innovative endeavors. So growth now slows.
Others, including Lawrence Summers, Paul Krugman and Ben Bernanke argue that we have a savings glut, and that this will continue to stall growth. If they are right, the problem might be short lived, lasting perhaps another generation. Most usefully, the savings glut is potentially responsive to public policy. If Cowen and Gordon are correct, there is no end in sight to slower growth.
This means that economic growth for the next decades or longer might well be so slow as to shock many Americans. When adjusted for inflation, annual growth of perhaps 2 percent may be common. To put this in perspective, what I call the “psalmist” level of growth is roughly 1.7 percent. At this rate, the standard of living for the average American will double in the three score and ten years of a Biblical lifetime. At 4 percent growth the standard of living will double every 21 years or so (I correct for expected population growth in both estimates).
This means, at the end of 2015, the current economy appears very different from the one that formed our expectations and those of our parents.