This is an excerpt from an essay by Peter Ferrara in Forbes.com:
From 1947 to 2007, the U.S. economy averaged real growth of 3.2% a year. At that rate, our GDP would double every 22 years. It is that sustained, long term economic growth that made the United States into the world’s dominant superpower.
Last year, U.S. real economic growth was a paltry 1.7%. The current quarter will probably not be much better. Historically, the deeper the recession, the stronger the recovery. That is because the U.S. economy has always rebounded back to the long term economic growth trend. But not this time. Because the recovery has been so weak and so far below historical standards, at current trends we will be 20% below the long term trend line for the U.S. economy permanently. . . .
Yet, if we go back into recession next year, our standard of living will fall farther and farther behind the U.S. economy’s long term trend. That is fundamental change, but not that we can believe in, or that gives us hope.
But another recession next year is exactly what I expect under current policies. . . . With the Obamacare taxes going into effect next year, and the expiration of the Bush tax cuts, which President Obama refuses to renew for singles making over $200,000 a year, and couples making over $250,000, in other words, the nation’s job creators, small businesses, and investors, the top tax rates of virtually every major federal tax will soar. . . .
In stark contrast, the American economy catching up to its long term economic growth trend line would mean the economy booming over the next 10 years with average annual real growth of 4.4%, and then continuing on after that at 3.2% real annual growth. Ten years of 4.4% real growth would leave the American standard of living, and GDP, over 50% higher than today. That is the boom this economy has in it naturally, with the right pro-growth policies just getting the government out of the way, and freeing the economy to grow.
While I can agree with much Mr. Ferrara argues here, especially concerning the anti-growth policies of the current administration, his comparison of current US growth prospects to historical trends from 1947 is problematic. In analyzing postwar US economic performance we must correlate statistics with underlying fundamentals. Roughly, we can divide the past 65 years into 3 distinct periods. 1947-1968; 1968-1982 and 1982-2012. The first period was marked by the devastation of WWII in the developed world with the US economy left dominant. This favored rapid growth prospects with strong gains by US labor yielding the golden decade of the 1950s. With the Vietnam War and the Great Society, this engine ran out of steam and we were saddled with the long recession of the 1970s marked by inflation and oil crises. 1982 heralded the new age of capital and credit unleashed by floating fiat currencies and promoted by the US Federal Reserve. This was combined with deregulation of moribund industries, a tech revolution and economic liberalization in the non-Western world. But the main engine was credit, which exploded in the private and public sectors.
This ultimately yielded the world financial crisis of 2008. The problem is that this credit explosion borrowed a generation’s worth of demand from the future now denominated in crippling debt burdens in both private and public sectors. Debt service and de-leveraging will continue to be a drag on economic demand and investment opportunities going forward. Thus, to expect to wave a magic wand and get back to 4.4% growth for 10 years seems beyond fantastic. Notwithstanding the amazing technological developments coming, the nature of our globalized markets means labor incomes will continue to be pressured, constraining the demand for these technologies. To say nothing of the tax drain that entitlement liabilities present.
What we have is not so much a growth problem, as a sustainable distribution problem weighed down by insupportable debt burdens. That said, we still need to change course in 2012. That primarily means tax reform and a sane monetary policy.