Dr. Mike Walden
North Carolina Cooperative Extension
Politicians of all parties and persuasions have one thing in common on the campaign trail: They are talking about economic growth. Actually, they’re talking about the lack of robust economic growth and solutions for making the economy stronger.
It’s not that the economy isn’t improving; it is. In fact, the economy has been expanding for seven years. This is the third-longest economic growth period since World War II. Of course, when I say the economy is improving, I don’t mean for everyone and everywhere. There are big disparities in economic conditions for both people and places.
But the numbers clearly show the pace of overall economic improvement hasn’t set any records. Using the broadest measure of growth – the annual increase in the inflation-adjusted value of products and services produced in the country (“GDP,” for economic enthusiasts) – the average annual growth rate in the last decade has been 50 percent lower than in the last half-century. And even though North Carolina’s growth rate has been higher than the national rate, the same result is found: The state’s annual growth rate was cut in half in the last decade compared to the last half-century.
There are two questions to address about the growth slump. The first is, what’s causing it? The second is, what – if anything – can we do about it? As you will see, there’s an abundance of both economic diagnoses and solutions.
Like almost every issue in economics, the examination of lackluster economic growth can be divided into “demand” explanations and “supply” explanations. “Demand” answers point to a lack of consumer spending as the reason for sputtering economic growth. “Supply” answers point to problems on the production side of the economic equation.
Three concerns headline the “demand” story for slow growth. One is the increase in income inequality, meaning a larger share of aggregate earned income is going to the richest households. The reality is that richer households spend a smaller share of their income than lower-income households. So, the argument goes, if the rich are earning relatively more but spending relatively less of all income, then total consumer spending – which drives 70 percent of the economy – will be in a low gear.
The demand-siders also worry about an overhang on consumers from the Great Recession. Consumers went in to the Great Recession loaded with debt, and that debt generated strong spending. During the recession, consumers voluntarily or involuntarily paid off over $1 trillion of debt. Prompted by new-found frugalness and federal legislation (Dodd-Frank) making it harder to get loans, consumer borrowing – except for student loans – has not rebounded. With less borrowing, spending also suffers.
Speaking of student loans, a third demand-side concern is that the emerging millennial generation may be contributing to slower growth in two ways. First, they are staying in school longer than previous generations, meaning they are delaying making the kinds of expenditures that young households typically make when they get a job and strike out on their own. Second, when they do graduate, their spending is restrained by their student debts.
The supply-siders focus on two factors in explaining slow economic growth – labor and infrastructure. The percentage of adults in the labor force – termed the “labor force participation rate” – is at a 30-year low. Some of the drop is explained by baby-boomer generation retirements, and some is explained by more young people going to college. But estimates suggest one-third of the reduction is due to other things, such as some adults not having the needed skills to work. With relatively fewer people working, there is less economic output.
The plunge in worker productivity gains is, quite frankly, somewhat of a mystery to economists. Some say it’s a result of the “changing of the guard” in the labor force, with experienced baby boomers being replaced by inexperienced millennials. Others say the disappointing productivity numbers point to issues in our educational and training issues. Yet whatever the reason, if worker productivity gains are small, the economy will grow at a snail’s pace.
The country’s infrastructure – akin to the body’s skeletal system – is aging. Just as humans slow down when their bones deteriorate, so too the economy can falter if our roads, bridges, airports, ports and electric grid are beyond their prime.
Some economists predict economic growth will eventually accelerate on its own, as the millennials become more experienced, pay off their student debts and eventually borrow to buy homes, appliances and furniture. So time will cure our economic growth ills.
But other economists aren’t so sure and so call for action. Demand-siders recommend higher minimum wages and tax policies to reverse income inequality and spark consumer spending. They also want programs to moderate student debt. Supply-siders worry about programs and policies that might diminish incentives for hiring, like expanded disability income eligibility, health insurance requirements for businesses, and high marginal tax rates. Demand-siders also recommend a renewed focus on school-to-work programs, improving college graduation rates and upgrading public infrastructure.
Faster growth could solve many of our current economic issues, from slow gains in the standard of living, lack of funds for retirement saving, to the expanding national debt. I’ve outlined a menu of possible causes and answers to the growth issue. All of us – including the political candidates – will have to decide which path may lead us to a more prosperous future.
Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy.
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