Low Growth the Normal Normal


Why Trump’s and Clinton’s Economic Plans Will Fail

Economic growth showed some signs of life last quarter.  But since the great depression of 2008, GDP growth has been below what is considered normal despite historical low-interest rates and continued deficit spending.

Some have suggested that low GDP growth is the new normal.  But two recent well-received books by economics professors ask if low growth is not the new normal but the normal normal.

In Thomas Piketty book Capital in the Twenty-first Century, the French professor takes a long view of economic history, mining data from before the France Revolution.  Mr. Piketty concluded that the GDP over the long term rises at what we would consider the low rate of 1 percent per capita.

Mr. Piketty’s thesis is that the higher growth that we see is a result of GDP growth pumped by population growth that does not increase per capita standard of living, the effects of booms and bust in markets and the catch-up effect.  This catch-up effect occurs after a major disruption in the economy; like World War I and II.  Note the high rates of growth in the US, Germany, and France in the post-war years.

Japan’s high rate of growth in the 70’s was a function of taking a long time to recover from the war.  In China, we have recently seen astonishing rates of growth as it recovers from the Cultural Revolution and failed economic policies of the Maoists.  But once these disruptions are overcome and over the longer reach of time, the GDP settles in and holds steady at 1 percent of per capita.

Professor Robert J. Gordon’s book; The Rise and Fall of American Growth puts forward a different theory on why growth is slowing down. In its simplest form, he states that you literally cannot reinvent the light bulb.  Gordon believes that the major driver of growth and increases in our quality of life (not always captured in the economic date) are the innovations that have occurred in the time period beginning just before the civil war and accelerating though World War II.  Mr. Gordon suggests that this unprecedented run of human advancement slows down dramatically in the 70’s and will not be repeated.

While Professor Piketty and Professor Gordon have differing views on why growth is slowing down they are not mutually exclusive.  They could, in fact, both be right. If they are right and low growth is the normal normal, this would have broad implications for policy makers in government and business.

First and foremost, Jack Kemp’s assertion that you can outgrow the national debt is no longer operable.  Outrunning debt in government and business is a time-honored strategy.  But in a long-term low-growth scenario continued deficit spending  will increase the interest payment on the national debt consume more and more of revenue.

Second; effects to prime growth put forward by both Presidential candidates could make matters worse.  Both candidates believe that increasing growth is the magic elixir to an ailing economy. Traditional policies of cutting taxes put forth by Trump and increases in government programs/spending by Clinton may not increase growth enough to generate the taxes needed to offset the cost, only increasing the national debt.

Any stimulus package designed to jump-start the U. S. economy needs to have an impact that lasts long after the initial investment is spent.  Otherwise, you will have only increased the national debt making it just that more difficult to cope with a long-term low growth economy.

Coming Soon: Part 2, What is to be done in a low growth environment.

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