Investors reading press reports on the U.S. economy have good reason to be confused. On the one hand, the U.S. looks in pretty good shape when compared to its European and Asian counterparts; most of Europe appears on the brink of recession and economic growth in China continues to slowly decelerate. But, relative to historic levels, economic growth here at home appears frustratingly stuck in low gear. Since the 2007 downturn, the economy has grown on average 2% a year, well below the 3% level that economists consider its full potential. And while the economy has finally recovered all of the jobs lost during the downturn, wage growth has barely kept pace with inflation (see chart below).
Two factors appear to be holding the economy back. First, growth in the nation’s labor force has stalled. Baby-Boomers, entering the period of time when early retirement beckons, are not adding to the ranks nor are women whose workforce participation rates have plateaued. Falling fertility rates as well as restrictive and unclear immigration policies are also contributing to the problem. The outlook for a rebound here is not great. According to the U.S. Census Bureau, America’s working age population is expected to grow 0.3% each year from 2010-2030.
As the chart below shows, weak productivity trends are also holding back economic growth. Over long periods of time, productivity or output per hour worked has increased about 2%-3% each year. But since 2007, productivity gains have slowed measurably to a 1.5% annual rate. Speculation as to the causes of this decline include the disruptive nature of new technologies such as “big data,” weak private sector investment and low levels of business formation.
Regardless of the root causes, a number of initiatives could help reverse our weak economic trajectory. Developing clearer immigration policies to include expanding the number of H-1B visas for highly skilled workers would be a good place to start. Labor laws encouraging more family friendly policies and flexible work schedules would help attract and retain women and older workers. Finally, an overhaul of the nation’s disability program, whose ranks have swelled in the last decade, would help many individuals return to productive work.
A serious effort to promote productivity enhancing investments is also needed. While technological innovations such as robotics may come to mind, investments in more basic infrastructure to include everything from bridges to waste-water treatment plants are also needed. Much of the nation’s road system was put in place in the 1950s when Dwight Eisenhower signed the Federal Highway Act into law. Most of the nation’s water and wastewater systems are even older, dating back to the early 1900s. Unfortunately, funding to repair and replace these systems is drying up just as many are coming to the end of their useful lives. In 2012, infrastructure spending in the U.S. fell to a 20-year low of 1.5% of GDP. This rate puts the U.S. 14th on the list globally behind China which today spends 7% of GDP and India which spends 5%. The cost of not attending to these projects will only mount over time. Consider Houston where more than a quarter of the city’s water supply is either lost or unaccounted for because of leaks each year.
Funding for worker education and research & development should also be considered priorities. On the education front, STEM (Science, Technology, Engineering and Math) programs at the high school and college levels should be a focus as well as basic research, an area not often funded by the private sector.
Expensive government programs can only be a part of the solution. A vibrant private sector capable of creating high paying jobs has always been central to our economy’s success. Policies that foster business development, such as clearer and more predictable regulatory regimes, must also be part of the mix. The policy prescriptions outlined here are not new. But developing the political will to promote and fund them will represent a new and necessary step forward.
