Edward Lotterman

Many people think that the U.S. economy is in terrible shape – regardless of highly positive numbers for unemployment, growth in jobs and in the value of output of goods and services. Even though consumer prices increased only 3% over the last 12 months, many people will tell you that inflation is the worst it has been in decades.  Economists are stumped. However, that may be positive on two counts.

First, the current situation may quash economic theories based on the assumption that the general public is not only highly informed about economic conditions, but that collectively, they accurately can foresee what government will do, what the effects of such policies will be and thus how to best protect their own positions as circumstances evolve. That “rational expectations” theory was all the rage in the last 20 years of the 20th century but is increasingly ignored as the world has moved on.

More importantly, concern about a bad economy in the form of an inflationary spike after COVID may motivate reflection about a real but largely ignored problem, historically bad growth of the real economy for more than two decades. In this millennium, growth of “real,” that is inflation-adjusted, production of goods and services has been much worse than during the Great Depression.

From the first quarter of 1930, starting three months after the historic New York Stock Exchange crash, to the first quarter of 1940, real output grew by 31 percent. That decade, seared into the memories of our parents or grandparents, is etched into U.S. history as an economic disaster.

Now take the period from 2000 to 2020. Real output increased by more – 44 percent versus 31 percent – but in two decades rather than one. If one calculates an average annual percentage growth rate using the same formula as for compound interest, the annual growth rate for the 1930s was 2.7 percent. For the first 20 years of this millennium, the average is 1.8 percent.

In other words, growth of output of goods and services to meet people’s needs has been only two-thirds as fast as in the worst decade in modern U.S. history. Yet hardly anyone, academic or political, has shouted this issue from the rooftops.

It is highly important to understand that output of goods and services is the determinant of real income and of the level of living for a society as a whole. Slow-growing output means slow-growing incomes for households and slow growth in their living standards. If post-Baby Boom age cohorts think things are not improving for them, they are right. This is true even before considering the retrogression in income distribution. We are moving toward more concentration of income at the top as we had at the end-of-1800s Gilded Age.

The whole idea of measuring Gross Domestic Product and other indicators of income derived from it was only developed in the 1940s. When implemented, there was good data to tabulate these indicators back to 1929. Tabulations even further back have been made, but with increasingly thinner data and hence less reliability. So it is impossible to be sure, but the first two decades of this millennium may have been the most dismal in all of U.S. history.

Of course, one must also consider the rate of growth of the population due to “natural increase” and to net immigration to put things on a per capita basis. We had very rapid growth of total output between the Civil War and World War I, but we also had high immigration and the extension of agriculture, forestry and mining to vast areas west of the Mississippi.

Thus one cannot make sweeping and definitive conclusions about all of U.S. history. But it is clear that economic growth since 2000 has been the worst in the last 90 years. That is of huge importance and should have been a hot political issue in at least the last four presidential elections since the trend became clear.

The question is why growth is so slow. It is not easy to answer, but ideas will pop into people’s heads.

Has increased international trade harmed our nation? One of the last acts of the Clinton administration was to secure congressional approval for admission of China to the World Trade Organization. Critics often cite this as a key fork in the economic road.

Some key U.S. industries have, indeed, faced greater pressure from foreign competitors. But that was well underway in the 1980s, when economic growth still was well above recent levels.

U.S. agriculture went through a wrenching structural adjustment with a high fraction of viable farms in 1980 going through bankruptcy before 1990. The predominant economic story of the 1980s was the decline of the “Rust Belt,” the complex of steel, automobiles, heavy machinery and of the mines supplying coal and iron ore needed.

Many historic firms disappeared or were sharply restructured. We lost some 300,000 auto manufacturing jobs and as many again in steel and its supporting sectors. Yet growth remained at some 3.4% a year and picked up in the 1990s. China was not yet formally in the WTO, but we effectively had granted it the same status already in 1979. It’s formal accession meant little.

What had happened was that China had grown enormously and the sophistication of products it produced had soared.

People will also point to immigration. The fraction of U.S. residents born in other nations has grown and is nearing levels before World War I. But immigration was similarly contentious in the 1980s and led to the 1986 Simpson-Mazzoli Act that was supposed to solve all problems. And, historically, high immigration tends to increase overall output due to more plentiful labor supply, even if it hurts workers in specific sectors.

What about government policies?

Well, we did further the deregulation of the economy started by President Jimmy Carter’s deregulation of transportation and the breakup of telecommunications monopolies begun even earlier. We did away with the 1930s walls between insurance and banking and between commercial banking and Wall Street finance.

We also reduced income taxes on both households and corporations. After four fiscal years with slight budget surpluses at the end of the Clinton administration, George W. Bush got substantial cuts in 2001 and 2003. These and deregulation were supposed to spur economic growth, but the reverse proved true.

Reasons for the slump probably are very complex and require public examination. But first, Americans need to recognize that the problem exists and need to hold political candidates to account on it.

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.