It has been seven years since the Great Recession ended, and the recovery has been mostly mediocre. The economy has not improved dramatically at all, and it is reaching a point where it will meander back into a recession. The issue is not that it hasn’t made up for lost ground; it certainly has. It's that the labor force participation rate is down and wage growth and underemployment remain high for many people. The jobs that have been added often aren’t the same quality. Growth hasn’t exceeded 3 percent since 2005 even with a fairly loose monetary policy and near zero interest rates. The economy, in short, is like a guy limping on one leg; its definitely not at its full capacity.
Why is that?
The issue is that the economy is mired in secular stagnation. The economy is basically in a period of extended slow growth and mediocre performance. The issue compounding this is that it has entered a liquidity trap; the interest rates needed to have high economic growth are effectively around zero. Traditionally central banks like the Federal Reserve have sought to combat recessions by cutting interest rates and making it much easier for businesses and individuals to get credit. They would raise the rates to combat overheating economies and increasing inflation, which led to reduced availability of credit and oftentimes recessions. But when the rate is close to zero, it is impossible to rely on it in times of recession. This happened to the US in 2008; interest rates had been kept low for years, and, when the mortgage boom that was caused by these rates floundered and collapsed, the Fed was stuck.
The Fed decided to combat this with quantitative easing. This basically meant buying assets from banks and private sector stocks to increase the money supply and encourage inflation. This policy is one of the reasons why the US economy has been able to somewhat recover from the 2008 crash as opposed to simply stagnating like France, Italy, Japan, and many other countries. But the policy has failed to create inflation; inflation is around 1 percent right now. This essentially means that the economy is not really at full employment; companies are not competing for workers and raw materials and spare capacity to produce goods, which would ordinarily drive inflation. This matches the general view that the economy is rather lethargic right now.
It is not, of course, President Obama’s fault. Nor could you blame the Republican Party, but their obstructionism has reduced business confidence and willingness to invest in new production and hire people. The real issue is that the economic model we use today, neoliberal economics, has run out of steam and no longer works. This policy emphasized reducing government intervention in the economy and opening up the free market. While this policy worked really well in the 1980s, 1990s, and up until 2007 to be honest, it lead to several speculative bubbles that were responsible for the majority of economic growth. And when these bubbles burst, the economy would enter a recession and the stock market would crash. The issue is that this growth was not built on solid foundations; this led to several problems forming.
The main issues are rising personal debt, stagnant incomes, and the over-reliance on finance. The rise in personal debt is simple enough; many people have consumed and acquired a large amount of debt just to participate in the modern consumerist society. This is further bolstered by a less restrained free market. This has a bad long-term effect because it consumes greater shares of future income for people and makes it more difficult for them to invest and save for the future. Stagnant incomes are also an issue; wages and household incomes have not increased much since the 1980s for most Americans. This has contributed to the rise in personal debt because incomes have not risen to allow for more consumption. Income inequality has risen dramatically since 1980, and this is because neoliberal policies have mainly benefitted the rich in terms of decreased taxes and increased investment opportunities. But this has not benefitted average Americans that much, who have not seen their incomes grow much at all.
Finally, the economy’s over-reliance on finance has resulted in shaky, volatile growth; this growth is often not sustainable and the bubbles do not necessarily mean the economy has good fundamentals. Furthermore, the financial sector experiences a lot of ups and downs; it is not a reliable engine for driving economic growth that is sustainable and that benefits the country as a whole. This is clear when looking at the Great Recession; the economy’s over-reliance on housing and mortgages led to a massive crash and a crisis that showed the fundamental weakness of the economy. Since then, the recovery has been slow due to a lack of factors sustaining demand. Without speculative bubbles and households taking on more personal debt, consumption cannot rise. And because wages and incomes are still stagnant, middle and working class Americans are not able to spend as much, keeping economic growth low.
What is the solution to this dilemma? There are two things that can be done; having more government spending and encouraging the proliferation of technology. A return to Keynesian economics and the fiscal policies of the 1950s and 1960s would help by boosting growth and putting more money in the hands of most Americans. This would boost the consumption, which in turn would lead to higher growth and continued prosperity; this would create a new virtuous cycle that would propel the economy forward in a stable, sustainable manner. Another facet of this would be more job training programs and more investment in public university education; this would create a more skilled workforce and allow more Americans to get ahead in the workplace. It would also enable them to better adapt to the rapidly changing economic situation of today.
Another is encouraging technological innovation as a whole. One of the key strengths of America is its history and culture of innovation and risk-taking; this is what made America the largest economic powerhouse in the world. Tech startups are merely the modern iteration of this old innovative tradition; companies like Google, Microsoft, Tesla, and Uber are revolutionizing the world as we speak. The benefits of technology include reduced prices of goods and services and/or improved quality of these products. Technology boosts the productivity of workers and can help them enjoy a higher standard of living with cheaper, better goods. One way to encourage innovation is to promote STEM education and invest in basic science and engineering research. Another is to reduce political gridlock; this has played a role in discouraging investment in new projects and new technologies.
By doing these things, the American economy could enter a new golden age and break out of this miserable stagnation!
