Over the last 5 years, while the stock market has fully recovered from the financial meltdown and then some, a significant fraction of America has remained convinced that we are still in a recession. While the official employment rate has come down to around 7%, improvement has often come in part due to people giving up looking for work, rather than employment actually increasing. Economic growth, while real, has been sluggish, as opposed to the more spectacular growth rates seen coming out of previous recessions. What has caused this, and will America ever return to the growth rates with rising
standards of living that generations of Americans have come to expect?

The first issue is that the ‘Great Recession’ was caused by a financial/banking crisis, rather than a cyclical recession. Recessions caused by a banking crisis tend to be more severe and the recovery more sluggish than typical cyclical recessions of the sort experienced by most Americans prior to 2008. In this way, the sluggish recovery is not simply a product of Barack Obama. A President McCain or a President Romney would have presided over a sluggish recovery as well. Exactly how sluggish is a matter of conjecture, but commentators would have been dubbing it ‘the worst recovery in post-war history’ in any case.

The second broad issue going forward is that America (and the West in general) is facing some secular economic headwinds that it has not had in the past. First among these is the aging of society. As a society gets older, the portion of the population that has to be “carried” by the rest of society increases and creates an economic drag (money spent to sustain the elderly is not available to fund an expansion of the productive economic base of society, such as more industrial machinery for example). A second headwind is that the economy is not producing enough jobs to keep pace with the number people coming out of college and entering the labor force. The result is often people moving back in with their parents or scraping by in jobs that they are over-qualified for (under-employed). This too is a drag on the economy and a loss of economic potential.

The third major issue, which is related to the prior paragraph, is that a large fraction of the American population is currently engaged in economically unproductive activity. I am not just talking about retirees, unemployed, and welfare recipients, but rather people who work (sometimes work very hard) in areas that add little to no economic value. For example, take federal tax compliance. Americans spend over $100 billion dollars a year in tax compliance, from companies that help people fill out simple tax forms, tax attorneys, tax accountants, IRS clerks, etc etc. This money is spent to simply move dollars from the taxpayer to the Treasury. Simply throwing out the tax code and instituting a national sales tax in its place would produce the same result at a fraction of the cost. Almost this entire industry is economically unproductive. And this is just one example. As America has moved from an industrial economy that makes things to a post-industrial service-based economy, the fraction of the labor-force engaged in economically unproductive activities has increased. Going forward, this also will continue to be a drag on the economy.

To sum up, the American economy has certain headwinds that are secular in nature and have been decades in the making. Furthermore, some of these issues are really beyond the ability of policy-makers to address in a politically relevant (to them) time horizon. While the negative economic impact of the financial/banking crisis will fade as we move forward and the numbers should improve, the long-term secular problems will remain and will likely continue to make economic expansions less satisfying and feel less “spectacular” than what our parents and grandparents were used to.