U.S. President-elect Donald Trump and his appointees should look more closely at the economy. The incoming administration has been talking about achieving rates of economic growth approaching the 4% level.
But what if economic growth cannot return to rate of 3% or more? What if economic growth can only stay for the short term in the 2% to 2.5% range?
Real GDP has only increased at a 2.15% growth rate, year over year, for the past seven years, ending in the third quarter of 2016.
The most recent quarter, the third quarter of 2016, was just revised upward to show a 1.6% year-over-year increase. The year-over-year growth rate was 2.2% in the third quarter of 2015 and 2.9% in the third quarter of 2014. In other words, economic growth seems to be slowing instead of accelerating.
This economic growth has been achieved with substantial fiscal deficits by the U. S. government and the most aggressive monetary policy U.S. history.
Maybe economic growth over the long run depends more on the supply side of the economy, and not on creating more aggregate demand.
Maybe economic growth requires more structural changes to the economy, changes that will alter the structure and makeup of the economy and that will take a long time to bear fruit.
Maybe economic growth cannot just be stimulated by demand-side programs. Maybe the more crucial information we should be focusing on is growth in labor productivity, which since the end of the Great Recession has been close to zero.
Maybe we should be focusing more on boosting the labor force participation rate, which hovers at levels that existed in the latter half of the 1970s, and not just the unemployment rate. The latter does not account for people who have left the workforce.
Maybe we should be looking at the manufacturing rate of capacity utilization, which after more than seven years of economic recovery, is around 75%. In the middle of the 1960s, it was around 90%.
More economic research is showing that these supply-side factors are more important for sustainable economic growth than the financial engineering that Washington has been using to manipulate the government's fiscal and monetary policies.
The economist Robert Gordon recently published a well-received book titled The Rise and Fall of American Growth. He claims that the exceptional growth in the U.S. economy that ended by the 1970s was due to an unusual series of job-creating innovations and a world war that emphasized high levels of productivity.
The innovations occurring over the last 40 years or so have not been as productive as in the earlier time, and there has not been exceptional pressure on the economy due to war-time needs.
Another work just released by Marc Levinson, entitled An Extraordinary Time, supports Gordon's conclusions. He begins his work by focusing on the 1950-1973 period, and comes to roughly the same conclusions.
The basic idea is that there were unusual circumstances that impacted this earlier period, which resulted in exceptional growth.
Over the past 40 years, things have returned to a more normal pace, and economic growth has been slower.
So what can be done?
Education and training are two things that come to everyone's mind. With almost 40% of the working-age population out of the workforce, one has to be concerned about a skills gap -- namely that people lack the skills that companies need.
Furthermore, with issues like those raised in Charles Murray's book Coming Apart and J. D. Vance's book Hillbilly Elegy, there are social issues that must be addressed that have no good, short-run solution.
Then there is building up the infrastructure, but one has to be careful here. As Karl Rove points out in Wednesday's The Wall Street Journal, all infrastructure spending is not alike. To create structural changes, infrastructure spending must be conceived with a focus on long-term results. Something to just get the economy going again will leave everyone dissatisfied.
The infrastructure of concern here includes not only highways and bridges, but health care systems and the internet.
The new administration's focus should be on achieving long-term goals that will over time contribute to a more efficient, productive and inclusive economic structure.
This will spur greater economic growth, but the important thing is that it will use the country's resources, both its human and physical capital more effectively. It will address some of the massive discontent that exists within our society.