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October 9, 2016

Slow Growth Our Biggest Problem

The most critical issue facing the United States simply is economic growth. Since World War II the economy has expanded at an average rate of 3.5 percent annually. We’ll be lucky to average 1.5 percent in the decade after the Great Recession. This sounds like a small difference, but it is not. At current population growth rates, 3.5 percent economic growth will cause the standard of living double in 25 years. At 1.5 percent it’ll take whopping 88 years for the standard of living to double.

The economic, political and cultural difference couldn't possibly be larger. A 3.5 percent growth rate means that a typical child born today could expect her standard of living to be twice that of her parents at about the time she is a young adult. At 1.5 percent growth, her standard of living would double only by her old age – if she lives a decade beyond her statistical expected lifespan.

In a faster growing economy, lots of problems resolve themselves. Government debt gets paid off, fewer people require public assistance and tax revenues remain strong. In a fast growing economy, businesses focus on expanding, hire workers and look optimistically into the future. Rapid growth benefits the wealthy and poor alike, tends to accommodate more social mobility and allows people and governments to consume a wider range of goods, from clean rivers to prenatal healthcare to space programs.

Fast economic growth won't cure all our ills, and there's reason to suppose that were we to better measure our economy it might look better than the 1.5 percent growth we’ll have this year. Still, the gap between the speed we are growing and the speed we could be growing is the most significant challenge we face because it makes all our other problems so much more daunting.

Slow growth will continue to impact nearly everything we do both privately and publicly. It influences where and to what degree we help spread our values abroad and defend our national interests. It influences what we spend on human capital, public infrastructure investment and social services. It will affect the size and composition of our families, how long we go to school, what types of leisure activities we engage in and how our culture will accept change of all types.  

With growth this important, one might suppose it’d be center stage in the economic policies of both presidential candidates. It Is not. Donald Trump’s plan calls for tax cuts and spending increases, which might generate some short-run GDP increases. But, the scale of the impacts and the nearly certain increase in the deficit mean that these policies will be terribly disappointing. Trump’s plan to disrupt international trade will, under the best circumstances, be hugely damaging in the short run. In the long run, they will be reversed because of the short-run pain. There is no serious growth plan from Trump’s campaign.

Secretary Hilary Clinton wishes to increase taxes and social spending. While her plan has a nod to long-term infrastructure spending, the history of the world holds precisely zero examples of increases in taxes and social spending actually boosting GDP growth. Clinton's plan and Trump’s plan are lousy in different ways.

It looks like we’ll have to suffer a few more years of slower economic growth, and a magnification of our other problems before we hear a cogent plan for economic growth from either party.

Link to this commentary: https://commentaries.cberdata.org/859/slow-growth-our-biggest-problem

Tags: election, budget and spending, federal government, economy, growth


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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