The growth of the US economy keeps falling short of expectations. On Friday, we learned that the US economy grew at an inflation-adjusted rate of 1 percent in the first half of 2016. That’s the slowest six-month growth rate since 2012, and it continues the slow growth that has characterized the recovery since 2009.
The weakness of the recovery has been surprising because conventional economic theory says that the bigger an economic downturn is, the bigger the subsequent boom will be. And the 2009 recession was the worst in decades, so post-2009 growth should have been massive.
Instead, the US economy has turned in its weakest performance in decades. Since 2009, inflation-adjusted output has barely grown at 2 percent per year. Business investment has been weak, wages have been stagnant, and worker productivity has improved at its slowest pace since World War II.
We’re not in a recession — the economy has grown and unemployment has fallen to a healthy 4.9 percent. But the economy isn’t delivering the kind of rising prosperity previous generations took for granted.
So what’s going on? It’s one of today’s most important economic questions, and there’s no consensus among economists. Here are eight of the leading theories.
Theory 1: We’re running out of innovations
The 20th century saw the development and widespread adoption of a ton of important new inventions: automobiles, airplanes, air conditioning, antibiotics, refrigerators, televisions, PCs, cell phones, and so forth. Yet with the notable exception of the smartphone, it’s hard to think of any major new technologies invented since 2000. Many aspects of our modern lives, from our kitchens to our streets, look little changed from 1996 or even 1976.
In a new book, economist Robert Gordon argues that this slowdown in new inventions is the root cause of the last decade’s economic malaise. He views the IT-driven boom between 1995 and 2005 as a one-time event that’s unlikely to be repeated. Now, he suggests, people are going to have to get used to slow growth of incomes, worker productivity, and the economy as a whole.
Two data points seem to support Gordon’s point of view: the rate of startup formation is at record lows, and so is overall corporate investment. That suggests that — perhaps — entrepreneurs and established CEOs alike are struggling to identify promising new technologies that are worth investing in.
Theory 2: There’s too little spending
Discussion of this theory tends to quickly get bogged down in technical jargon. But at a basic level the theory is simple: If the government gave people more money, they would spend it. And more spending would create more jobs and higher incomes.
There’s fairly broad agreement among economists that this kind of stimulus can work during a severe economic downturn. But the conventional view holds that it becomes less effective once the economy starts growing again. Indeed, Alex Tabarrok, an economist at George Mason University, argues that it’s "crazy" to believe that a lack of demand explains the slow recovery.
"The time period in which monetary policy would have been effective is long over," he says.
Once an economy reaches full employment, he argues, there’s no way for increased spending to boost economic output — you’d just get more inflation instead. And the US unemployment rate is currently 4.9 percent, near historic lows, a sign that a shortage of demand might not be a problem right now.
But other economists aren’t so sure. Larry Summers, an economist who led President Obama's National Economic Council during Obama's first two years in office, has championed a theory of "secular stagnation," in which peoples’ desire to save money outstrips opportunities to invest it. This leads to a vicious cycle in which slow spending growth makes companies pessimistic about future growth, causing them to cut investment spending even further.
So some economists believe it’s possible that more government stimulus — either interest rate cuts from the Federal Reserve or more spending by Congress — could set off a more vigorous economic boom that could expand the real output of the economy.
This could work in two ways. First, a boom could entice workers back into the workforce. The labor force participation rate for people aged 25-to-54 plunged after 2008 and is still near its lowest level in 30 years. A booming labor market could reverse that trend.
Second, more stimulus could actually make workers more productive. "We know the same person can be engaged in higher or lower productivity activities," says economist Josh Mason. "We have a lot of evidence that when you have a high-pressure economy, you have people shifting to high-productivity activities."
When labor markets are tight, companies are going to look harder for ways to make their employees more efficient. Companies might invest more in retraining workers for higher productivity jobs or they might invest more in labor-saving devices to economize on rising labor costs.
Tighter labor markets can also help better match firms to workers, as Mike Konczal and Marshall Steinbaum argue in a recent paper. When jobs are plentiful, people are more willing to make risky job moves because they know they can always go back to their old job — or one like it — if it doesn’t work out. In contrast, in a more sluggish economy a lot of workers become locked into jobs they don’t like very much and may not be very good at because they’re worried that a job switch could lead to an even worse situation.
Theory 3: Bad corporate governance is causing companies to under-invest
Another possibility: businesses have plenty of investment opportunities, but pressure from Wall Street is discouraging them from making them. This is the "quarterly capitalism" critique Hillary Clinton has talked about on the campaign trail.
Over the last couple of decades, we’ve seen the rise of activist investors that take a substantial stake in a company’s stock — usually 5 to 10 percent — and then use that ownership stake as leverage to try to get companies to change how they do business. One of the most common demands is for the company to pay more cash out to shareholders in the form of dividends or stock buybacks.
As I argued in November, there’s not much evidence for the theory that activist campaigns are hurting shareholders. Stock prices typically go up when activists target a company, and these price increases are sustained over time — suggesting that the activists create lasting value.
But it is possible that having companies increasingly focused on the narrow interests of their shareholders is bad for the broader economy. Investments in new technologies often produce broad social benefits — think about all the non-Apple jobs created by the iPhone — that are not fully captured by a company’s shareholders. So if Wall Street is pressuring CEOs to invest less in new technologies, that could be helping shareholders but hurting the rest of us.
Theory 4: The economy is weighed down with debt
A major factor behind the 2008 financial crisis was the high levels of debt accumulated by both individuals and businesses. When asset prices started to fall, people found themselves underwater, leading to defaults and panic-selling.
The acute phase of the 2008 financial crisis was over quickly. But economist Kenneth Rogoff has argued that the effects of these high debt levels lingered for years after the crisis. Households and businesses realized that they had excessive levels of debt. The result, Rogoff argues, has been a prolonged period of depressed demand as households and businesses focus on paying down their debts instead of buying new goods and services.
This seems like a plausible explanation for the early years of the post-2008 recovery. But at this point, it’s been almost eight years since the financial crisis. That should be more than enough time for households and businesses to get their debts down to manageable levels. So the longer growth remains sluggish, the less plausible this theory becomes.
Theory 5: Excessive regulation is holding back growth
This is probably the most popular theory on the political right: that burdensome regulations have slowed the pace of economic growth. This theory is catnip for Republicans because it places blame squarely at the feet of President Obama, who has pushed through the Obamacare, the Dodd-Frank financial regulation bill, stricter environmental regulations, and more.
Others point to burdensome regulations beyond Obama’s agenda. The White House itself has pointed to the proliferation of occupational licensing laws — for everything for barbers to florists — as an impediment to economic growth. A recent paper by economist James Bessen finds evidence that regulations have created barriers to entry that boost the profits of incumbents in certain industries while reducing the dynamism of the economy as a whole.
Yet it has proven hard to find evidence that this is a major reason for the slow recovery. "I thought that regulation was probably one of the major causes of declining dynamism," says Tabarrok, who co-authored a study on this topic in 2014. But he and his co-author were unable to find evidence to back up the theory. "The basic reason is pretty simple," he says. "You see declining dynamism in pretty much all industries."
The theory that regulation is the major factor choking off innovation is hard to square with the historical record. The US economy enjoyed its fastest growth in worker productivity in the half century between 1930 and 1970. This happens to be the period when many sectors of the economy were subject to burdensome New Deal-era regulations.
Policymakers relaxed these regulations over the course of the 1970s and early 1980s, deregulating industries like trucking, airlines, telecommunications, energy, and more. And yet, the growth of productivity and wages was slower between 1975 and 1995 than they had been in previous decades.
Tabarrok is quick to point out that this doesn’t mean regulation is harmless — it’s possible that many individual industries would be more productive with less regulation. But growing regulation does not seem to be the primary reason for the productivity slowdown of recent decades.
Theory 6: There’s too much housing regulation in big cities
Housing regulations are, of course, a subset of regulations generally. But there’s reason to think they could be significant.
Big cities and their surrounding suburbs have strict regulations that effectively limit how much housing can be built in the most economically dynamic metropolitan areas. The result has been skyrocketing housing prices and — more importantly — slow population growth in metropolitan areas like San Francisco, New York, and Boston. And that’s a problem because these cities account for a disproportionate share of innovation and job growth in today’s economy:
The chart shows the growth of establishments — that is, business locations like restaurants, car repair shops, or factories — during the first five years of the past three recoveries. In the past, smaller counties tended to grow faster than larger counties. This made a certain amount of sense — large counties like Los Angeles or Dallas were already expensive and crowded places to live, so it was easier for economic growth to happen in smaller towns or outlying suburbs.
But in the latest recovery, the pattern has reversed, with large counties like Los Angeles County, Miami-Dade County, and Kings County (Brooklyn) enjoying a disproportionate share of business expansion. The same pattern holds for job growth.
Obviously, this is bad news for people who live in small towns. But it may also help to explain the slow growth of the economy as a whole. Because it’s possible that big cities would be creating new jobs at a much faster rate if there were more workers available. But big cities’ housing restrictions mean that there’s nowhere for additional workers to live.
Theory 7: The economy is becoming dominated by big, incumbent companies
The period since 2010 has been bad for ordinary workers, but they’ve been great for corporate America. In the last six years, corporate profits have been at their highest level — as a share of the economy — since the 1960s.
Some commentators have argued that this reflects lax enforcement of antitrust laws, which has allowed many industries to become increasingly concentrated. With larger market shares, these big firms have more power to raise prices, and they’ve also become more effective at locking new firms out of the market.
There’s little doubt that there has been a trend toward industry concentration in many important industries, and it seems plausible that this is a factor in the growing profitability of corporate America. What’s not so clear, however, is whether this is leading to slower innovation.
Two well-known advocates for the view that industry concentration is holding back economic progress are Phillip Longman and James Schmitz. But I found their arguments hard to evaluate because they seemed highly backward-looking.
Longman, for example, argues that deregulation of the railroad, trucking, and airline industries allowed industry consolidation that has, in turn, hurt smaller cities and towns. That might be true, but it’s hard to believe that it’s a major factor driving recent economic trends. After all, the fastest-growing industries of recent decades — like software and finance — are not very dependent on railroads or trucking to get their goods to market.
For his part, Schmitz writes about the sugar industry between the 1940s and and the 1970s, the cement industry in the 1970s and 1980s, and the construction industry in the 1920s. His stories do a good job of illustrating his theoretical argument, but they don’t shed much light on whether growing industry concentration is a serious problem today.
Theory 8: A slow-growing, aging population is hurting growth
A final theory suggested to me by Tabarrok is demographics. Americans are having fewer babies than they did in the past, and this has had two related effects: The population as a whole is growing more slowly, and the average age of the population is rising.
There’s reason to think that both trends are bad for economic growth. Younger people are more likely to pursue new ideas, take risks, and start new businesses. So an aging population is likely to lead to a less dynamic economy.
Slower population growth can also be a source of economic stagnation in its own right. A rapidly growing population means rising demand for products of all kinds — new homes, restaurants, shopping malls, and so forth. So more businesses will be started in general, which means more opportunities for experimentation. Successful stores, restaurants, and other businesses can be expanded or franchised to other metropolitan areas, allowing good ideas to spread quickly.
In contrast, in a country with a more stagnant population, starting a new business requires replacing an existing business. Even if a young person has an innovative idea for a new company, the practical difficulties of getting the business started might be too great for putting the idea into practice. And so change can only happen by convincing existing business owners to change their behavior — an inherently slower and more difficult process.
Correction: This article originally misstated Larry Summers' role in the Obama administration.