Robert Samuelson March 30, 2013

You might compare the U.S. economy to someone who’s recovering from a serious illness. At first, everyone hopes the patient will return tonormal. Then it’s gradually realized that the patient suffered permanent damage and will never be the same. So, perhaps, with the economy. Since the Great Recession, the bland (often unstated) premise has been thatthe economy would ultimately recover in full. Now, some economistsquestion this and argue that the economic crisis created — or exposed —enduring weaknesses. We’re at a turning point. Even when producing at“full capacity,” the economy will grow more slowly than in the past orthan had been expected.

If true, this cannot be good. Economic growth serves as a political and social lubricant. It makes public and private goals more affordable and achievable. Slower growth would dampen gains in living standards.It would make it harder to reduce budget deficits without tax increases. It could threaten inflationary bottlenecks, as the economy hits maximum output before attaining “full employment” at, say, 5 percentunemployment. This would complicate the Federal Reserve’s policymaking.

To be fair, there’s no consensus. One prominent dissenter is Mark Zandi of Moody’s Analytics. In congressional testimony, Zandi said he expects the economy’s growth to accelerate in 2014 to 3 percent and to 4percent in 2015, up sharply from the 2 percent pace since the recovery’s start. More spending on housing and business plants and equipment willboost growth, he said. Financial conditions are favorable. Householdshave repaid debt; banks are well-capitalized. Once the economy improves, fears of a growth slowdown will recede like “a passing cloud.”

Economists’ pessimism emerges from their projections of “potential GDP.” GDP (gross domestic product) is the economy’s total output. Potential GDP is an estimate of what could be produced when everyone who wants a job has one andwhen businesses are operating at maximum capacity. Two factors governthe growth of potential GDP: changes in the number of workers (and timespent on the job) and changes in labor productivity. Productivity means“efficiency” and reflects many influences (technology, worker skills,management quality).

Potential GDP’s growth represents theeconomy’s speed limit when it’s near peak capacity. Trying to growfaster, it’s argued, will create shortages of workers, goods andservices — and raise inflation. Even before the Great Recession,economists had lowered estimates of potential GDP, reflecting theanticipated exit of baby boomers from the labor force. But the recentrevisions go beyond this widely predicted shift.

To take one example: Economists at Morgan Stanley cut their estimate of potential GDP growth from 2.5 percent annually to 2 percent. This compares with potential GDP’s actual annual growth of 3.2 percent from 1991 to 2001. These changes may seem small, but they’re huge when repeated year after year. Consider the Congressional Budget Office’s recent re-estimate ofpotential GDP for 2017. The new estimate reduces GDP by 7 percent from one made in 2007. That’s equivalent to $1.5 trillion in lost wages, salaries, dividends and taxes. Although these forecasts are only educated guesses, they are increasingly downbeat.

Possible explanations abound. The economic crisis may have degraded — for theforeseeable future — the economy’s psychology and mechanics. Labor force growth has dropped, as some of the discouraged unemployed take earlyretirement or simply stop looking for a job. Cautious companies havecurbed their investment spending; this threatens productivity growth.Another possibility is that the economy’s slowdown started before thecrisis but was obscured by the artificial stimulus caused by the creditbubble.

Other theories are unrelated to the crisis. Economist Robert Gordon of Northwestern University has argued that, since the early 1970s, technologicaladvances have lagged and that the Internet boom of the 1990s was only abrief interruption. Naturally, productivity growth has suffered. NobelPrize-winning economist Edmund Phelps of Columbia University, in hisbook “Mass Flourishing,” identifies a clash of values between what’s required for faster economic growth and what’s desired for personal security.

“Increasingly, the processes of a nation’s innovation — the topsy-turvy of creation,the frenzy of development, and painful closings,” he writes, are seen as something “that we are unwilling to endure any longer.”

Theissue is whether the financial crisis and Great Recession mark asignificant break with America’s dynamic economic past. Our ability toinfluence technology, business practices and worker skills is, at best,limited. Or are today’s low expectations a fad: a pessimism bubble thatwill pop on the first contact with faster growth? The slowdowns inemployment and productivity may be consequences, not causes, of weakeconomic growth. In this view, the resumption of faster growth wouldautomatically improve both. Is the patient still healing — or willinjuries persist? On the answer hangs a great deal.

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