Since the current economic recovery began in July 2009, the economy has grown for six and one half years at an annual compound rate of 2.1%. This is the slowest economic recovery since the World War II.
Below are two reasons why. Of the two explanations presented here, one focuses on the demand side of the economy and one focuses on the supply side.
On the demand side, Larry Summers, economist and former U. S. Secretary of the Treasury, presents one of the more complete examinations of this dilemma in the recent issue of Foreign Affairs, "The Age of Secular Stagnation: What it is and What to do about it."
Summers argues that the basic problem of secular stagnation is that the "neutral real rate" of interest is too low, which in the current case is a problem of the economy's real rate of savings being too high relative to the amount of investment demand that exists within the economy. (The "neutral" real rate of interest is that rate at which the real rate of savings would equal the real rate of inflation at full employment.)
And who can fix this problem?
Summers: "The primary responsibility for addressing secular stagnation should rest with fiscal policy. An expansionary fiscal policy can reduce national savings, raise neutral real interest rates, and stimulate growth."
That is, deficit spending would include large public investment programs, federal infrastructure programs, and "other structural policies that would promote demand include steps to accelerate investments in renewable technologies that could replace fossil fuels and measures to raise the share of total income going to those with a high propensity to consume...."
Secular growth problems, Summers suggests, began in the late 1970s and were only exacerbated by the monetary tightness of the 1980s followed by the move to a fiscal surplus by the end of the 1990s. The efforts in all these periods contributed to a growth in savings relative to business desires to invest and this continued on into the 2000s.
Summers sees this problem as a world problem and not just a U. S. problem.
A new book by Robert Gordon, The Rise and Fall of American Growth, provides another way to look at the slowdown in economic growth over the past forty years or so.
Gordon agrees with Summers that economic growth began to slow in the 1970s. However, Gordon points to the fact that the growth rate of the U.S. economy has been more a result of the slowdown in "Total Factor Productivity," or TFP.