It’s Economic Growth, Stupid!

A lot of ink has been spilt attempting to explain what is happening in American politics today. While there is no single explanation and there is validity in many of the theories, the single best explanation may be one of the oldest: people’s views on the economy shape their political views.

For far too many political leaders and commentators, the only two measures of economic performance are the monthly unemployment rate and the value of the stock market. Decades ago, that oversimplification may have sufficed. But circumstances have changed substantially since 1992, for example, when a presidential campaign reminded itself what the central issue was — “It’s the economy, stupid.” Large segments of the American people have a much better understanding of not only the state of today’s economy but also its future prospects.

Polling at the end of last year found that:

  • 72% of Americans believe the country is still in a recession.
  • The public is split evenly, 49% to 49%, between those who think America’s best days are behind her and those who think they are ahead of her; only 41% of Republicans and 33% of those who identify with the Tea Party think America’s best days are ahead.
  • 64% of Americans think that hard work does not guarantee success — a 10-point increase since 2013.

The data support these concerns.

It’s the economy.

  • Absent miracle growth in the last three-months of 2015, America just completed its 10th straight year of sub-3% economic growth.
  • Excluding the recession years of 2008 and 2009, growth has averaged just a bit over 2% since 2005.

This is unprecedented.

  • The four decades before the 2008 recession (1965 to 2007), growth — even with recessions –averaged 3.3%.

But absent correction, it is the new normal.

  • The Congressional Budget Office predicts that between now and 2040, economic growth will average just 2.2%.

Demographic changes contribute to slower future economic growth.

  • Potential economic growth is a result of labor force growth (more people providing goods and services) and productivity growth (getting more goods and services out of each unit of work).
  • After World War II, both population growth and women entering the workforce pushed economic growth higher.
  • From 1970 to 2007, the labor force grew an average of 1.7% per year. Between now and 2040, growth will just be 0.5%.
  • As the working age population shrinks, per capita GDP over the next 25 years will grow at just 1.5%, compared to 2.1% before 2007.

Small differences in growth produce big effects.

  • While it took about 27 years after 1960 for per capita GDP to double from just over $17,000 to over $34,000 it will now take nearly 50 years for per capita GDP to double.

Slower growth rates have a personal impact.

  • Median household income in 2014 was $4,000 below where it was 15 years ago.

The outlook for jobs is bleak.

  • Of the 15 occupations with the largest expected job growth between now and 2024, 11 pay wages below the median annual wage for all workers (below $35,540).
  • Growth in these 15 occupations is expected to result in an additional 3.5 million jobs — which is equal to about 35% of the total number of net new jobs.

No wonder so many people are so angry! A recent NBC/Esquire poll focused on attempting to understand this anger.

  • 49% of Americans, including 61% of Republicans, said they find themselves feeling angrier now about current events than they were one year ago.
  • 54% of Americans say their financial situation is worse today that they thought it would be with a plurality saying it is harder to get ahead today.

William Galston has written a series of excellent op-eds for The Wall Street Journal (here, here, and here) that, using much of the data above, offer an explanation between what is occurring economically and how that is playing out politically.

This is the GREAT challenge: Given the headwinds of demographic change and recognizing there is no silver bullet, the challenge to policymakers is to focus on a comprehensive set of policies that can lead to the type of economic growth that Americans used to enjoy and now see slipping away.