The U.S. economy has fallen below a key milestone: the 2% mark.
The Federal Reserve’s interest-rate setting body, the FOMC, released its quarterly projections for the American economy, and median estimate for the long-run growth potential of the economy among FOMC members is that the best the economy can hope to grow annually is at 1.8%.
That’s down from a median estimate of 2% in June, and far below the American economy’s average growth rate during much of the twentieth century of around 3.5%. In 2017 and 2018, Fed economists see growth coming in at 2%, before settling down to the 1.8% rate. That suggests that most FOMC members see the American economy as still playing catch up, and that there is room for above-trend growth in the near-term.
America’s political class will not likely take this news well.
Indeed, Republican presidential candidate Donald Trump has been using the recent trend of slow growth as evidence to attack the economic policies of Barack Obama and other politicians who have pushed for free trade. “Between World War II and the year 2000, the United States averaged a 3.5% growth rate,” Trump pointed out during a speech last week at the Economic Club of New York. “But, after China joined the World Trade Organization, our average growth rate has been reduced to only 2%.”
While we should expect politicians, especially those out of power, to use this news as a means of criticizing status-quo economic policy, there are structural reasons why we should expect growth to be lower in the future than in the decades following World War II. The most important is the fact that American women are having far fewer children today than in decades past. Because GDP is simply the sum of all the goods and services produced in America, a faster-growing labor force means that we can produce more things and GDP growth will be higher. Accepting more immigrants into the country could help assuage this trend, though the political will for such a move doesn’t appear to exist.
Furthermore, there were changes that occurred in the American economy in the 20th century that boosted growth, but won’t happen again. For instance, the entrance of women into labor force in large numbers cannot be repeated now that such large numbers of women are already working. Technological advances like widespread electrification or the computer revolution are one-time occurrences, and similarly revolutionary inventions cannot be counted on to appear in the future.
That said there are ideas on the left and the right, from investing in infrastructure to tax reform, that may help boost growth beyond what the Fed sees possible at this juncture. Hopefully this news will motivate politicians to set aside ideology and start experimenting with some of these methods.