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Rapid U.S. Growth Is Missing, Not Gone Forever

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Rapid U.S. Growth Is Missing, Not Gone Forever

We are now about five years into the deleveraging, and the related slow global growth, that followed the 2008 financial crisis.

My forecast is for another five years of unwinding the excess borrowing by banks worldwide, U.S. consumers and many other sectors.

The private sector deleveraging has been so severe that it overwhelms all the federal tax cuts and spending increases undertaken in response to the recession, as well as the central bank interest-rate cuts and quantitative easing that piled up immense excess member-bank reserves at the Federal Reserve.

If you need proof of the drag of deleveraging, look no further than the subpar 2.2 percent average real gross domestic product growth in the recovery that started in the second quarter of 2009 and the 1.7 percent growth in the second quarter of this year.

Most forecasters, however, initially thought that after the very deep 2007-2009 recession, the recovery would be equally robust. After all, that had been the norm. In the 15 quarters of this economic recovery, through the first quarter of this year, real GDP has risen 8.1 percent. Excluding the recovery after the 1980 recession that only lasted one year, the only other recovery this weak was the 7.5 percent gain after the 1973-1975 recession.

Salad Days

Most forecasters also yearned for the 3.7 percent average growth of the 1982 to 2000 salad days, when the economy was driven by declining inflation and falling interest rates as well as the consumer borrowing-and-spending binge that drove the household saving rate to about 1 percent from 12 percent in the early 1980s. Furthermore, that was an era of business restructuring, and as a result, stocks soared.

Nevertheless, as slow economic growth persisted in this recovery, many seers joined me in forecasting continuing slow growth rates of about 2 percent. They cited many of the causes discussed in my recent book, “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Among them are the shift by U.S. consumers from borrowing and spending to saving and financial deleveraging. This trend was compounded by the aging of the population, rising health-care costs, growing income inequality, high government debt and a faltering education system for many Americans.

Nevertheless, any phenomenon that lasts long enough generates theories that it will last forever. The average real GDP of just 2.2 percent since the recovery started, and of only 1.6 percent over the last 12 years, has spawned a number of such theories.

Harvard University economists Carmen Reinhart and Kenneth Rogoff, authors of the 2009 book “This Time Is Different: Eight Centuries of Financial Folly,” suggested in a 2010 paper that when central government debt exceeds 90 percent of GDP, the economy contracts at a 0.1 percent annual rate. Their findings became gospel.

In a 2011 speech to the Council on Foreign Relations in New York, the European Union Economic and Monetary Affairs Commissioner Olli Rehn said: “Carmen Reinhart and Kenneth Rogoff have coined the 90 percent rule. Huge debt levels can crowd out economic activity and entrepreneurial dynamism, and thus hamper growth. This conclusion is particularly relevant at a time when debt levels in Europe are now approaching the 90 percent threshold, which the U.S. has already passed.”

I’ve argued that net debt, or borrowing from outsiders, is the important metric, not the gross amount that also includes borrowing and lending among government divisions. But let’s not quibble. Even on a net basis, U.S. federal government debt is almost 90 percent of GDP.

Stagnation’s Trap

Glenn Hubbard, dean of the Columbia Business School and a former chairman of the Council of Economic Advisers, and Tim Kane, chief economist of the Hudson Institute, in their new book, “Balance: The Economics of Great Powers From Ancient Rome to Modern America,” express even more basic concerns. They say great powers fall into the trap of “denying the internal nature of stagnation, centralizing power and shortchanging the future to overspend on their present.”

They see “the storm clouds of history” gathering on the horizon because of the U.S.’s political inertia, anti-growth policies, the erosion of economic vigor and, especially, excess government spending.

Niall Ferguson, a Scottish historian who teaches at Harvard and is a fellow at the Hoover Institution, joins in with his new book, “The Great Degeneration.” He thinks government encroachment is strangling private initiative, especially in the U.S., threatening representative government, the free market, the rule of law and civil society. He focuses on the explosion of public debt in the U.S. as well as in Europe, the destruction of free markets by excessive regulation and the rule of law being replaced by the “rule of lawyers,” exemplified by complicated laws such as the 2,700-page first draft of the Dodd-Frank Act.

Ferguson worries that the U.S. civil society, with its many volunteer organizations that impressed Alexis de Tocqueville in the 1830s, is being replaced by the nanny state that promises cradle-to-grave security.


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