Since the great recession of 2007-2009, GDP growth has repeatedly missed the traditional ideal of 3 percent growth per year. In fact, in this article from CNS News, Senator Dan Coats, the chairman of Congress’ Joint Economic Committee, is quoted as saying “…The average growth rate for economic recoveries since the 1960s is 3.9 percent ranking the Obama recovery, with an average GDP growth rate of just 2.1 percent, among the slowest in history.”
So why has the American economy failed to recover from the great recession as quickly as anticipated? The answer is, of course, that it is not entirely clear and there are many possible contributing factors. As a result, there are a wide variety of theories explaining this phenomenon. Here are some of the theories surrounding this issue that I found to be compelling:
- One theory which was originally perpetuated by Robert Gordon, an economist at Northwestern University, argues that innovation in the American economy has slowed down, and as a result the growth rate has permanently slowed as well. Gordon argues that the rate of innovation in not only the United States but the entire world between 1750 and 2004 was essentially an anomaly, and we are unlikely to see any innovation growth like it in the foreseeable future. He argues that while more recent technological advances like social media have been wildly successful, they do not afford the same gains in productivity that technological innovations of the 1750-2004 period. Gordon uses Total Factor Productivity (TFP) to measure innovation in the American economy, and indeed a graph of TFP shows a flattening of the TFP growth rate in the years following the great recession.
I find Gordon’s argument compelling predominantly based on the principal of decreasing marginal utility. It stands to reason that as technology advances further and overall productivity increases, that each new innovation will have a lesser effect on overall productivity.
- In the ten years between January of 2006 and January of 2016, the United States’ debt-to-GDP ratio has skyrocketed from 61.33 percent to 105.33 percent. At first, this may seem rather unimportant, but when we consider the findings in this paper, we see that the growing U.S. debt-to-GDP ratio may help explain what many feel is rather unimpressive economic growth in the recovery from the financial crisis and subsequent recession of 2007-2009. Economists Carmen Reinhart and Kenneth Rogoff conclude that when a developed country reaches a debt-to-GDP ratio of 90 percent, the median growth rates in these countries decline by 1 percent and the mean growth rates in these countries declines by 4 percent.
Debt to GDP Ratio Historical Graph
From the graph, we can see that the United States surpassed Reinhart and Rogoff’s 90 percent mark around 2010, which makes this theory all the more compelling as the United States’ surpassing of this mark coincides with their recent weak economic growth.
- Though 2016 may be an indication of strengthening in consumer spending rates, consumer spending has not been as strong as many economists would hope since the great recession, as referenced in this article.
At least part of this phenomenon is attributable to the fact that average incomes in America have grown at an even lower rate than GDP in recent years, which discourages labor force participation and encourages more people to pursue further education. As a result, people tend to have less disposable income and by default spend less money. Further, in recent years the manufacturing industry has taken a hit as jobs have moved overseas and have been lost to technological advances, effecting the purchasing power of many manufacturing workers who are now either out of work or whose salaries have barely grown at all compared to GDP growth in recent years. As the article notes, this is a rather important issue as consumer spending drives almost 70 percent of the United States’ GDP.