Stagnation: America’s New Normal

Ever since the financial crisis, the US economy has grown at a stubbornly slow rate, far less than the 3% that was widely considered a sign of good health.

This disappointing outcome—the Federal Reserve expects the economy to grow only about 1.8% this year—has been blamed by economists on many factors: the financial crisis in 2008, fiscal fights in Washington, Europe's repeated debt crises, China's slowdown and more, news outlets reported.

Congress’ Joint Economic Committee, offers an opinion on what it calls the “new normal” or persistent economic stagnation:

The United States is in the midst of the most lackluster economic recovery in modern American history.  Eight years of economic stagnation has cost the median American family a cumulative $69,000 of income.

In addition, effective tax rates on American businesses remain among the most burdensome in the world, and the (President Barack) Obama administration continues to increase regulations at a record pace.

Furthermore, the administration’s Keynesian approach to economic stimulus has failed to promote strong, sustainable economic growth. … This recovery is so far behind the average of other post-1960 recoveries that to catch up by 2016’s end would require historically unprecedented rates of economic growth.  

Americans continue to await the strong economic growth and job creation they were promised. Unfortunately, many policies implemented by the Obama administration and congressional Democrats have stunted economic growth, discouraged job creation, and made more people reliant on government assistance.  

The opportunity to restore America’s prosperity is still attainable, but commonsense action is essential.  Lower tax rates, a simplified tax code, reduced government spending, free trade, and less burdensome regulation are the path to restoring American growth and opportunity.

Semi-Failure Policies

But according to provocative new research from Fed economists, there might be a simple explanation for the slow growth—and there might not have been much policymakers could have done about it. If the new explanation is true, it might also explain why efforts to boost economic growth—including trillions of dollars in monetary stimulus and near-zero interest rates—haven't worked that well.

In a new paper, the Fed economists argue that America's slow economic growth and low interest rates might have been largely inevitable—and they might not have much to do with the 2008 financial crisis at all. Their main culprit: demographics.

The researchers—Etienne Gagnon, Benjamin Johannsen and David Lopez-Salido—created a model of the economy that shows how changes in births, deaths, aging, migration, labor markets and other trends have affected the US economy since 1900.

Using that model, they find that most of the decline in economic growth and interest rates since 1980 has been due to intractable factors like the aging and retirement of baby boomers, lower fertility rates and longer life expectancy for Americans.

They find that these demographic changes account for a 1.25 percentage point decline in annualized economic growth since 1980, which is essentially all of the decline we’ve seen in that metric, according to some estimates.

Unemployment Rises

The US economy added only 156,000 jobs in September, the US Department of Labor announced on Friday, a figure likely to be seized on as the presidential race enters its final stretch. The unemployment rate was 5%, up from 4.9% in August.

Economists had expected job growth of 175,000 and the unemployment rate to remain unchanged at 4.9%.

Job growth has slowed down this year, with the number of jobs added averaging about 178,000 jobs a month. In 2015, on average about 229,000 jobs were added each month.

Friday’s report comes after a report released earlier this week by the payroll company ADP found that private companies added just 154,000 jobs last month. This was slowest job growth reported by ADP since April.