Is the Best Yet to Come?
Just how healthy is the American economy? There’s little doubt that it’s healthier than the euro zone, which seems to spawn a new fiscal or banking crisis every week. But with unemployment still above 7 percent, nobody in the United States is celebrating a revival yet. Could one still be on the way?
Economic forecasts are not especially rosy at the moment. The Congressional Budget Office sees robust growth returning in 2014 and continuing through 2018, but afterwards it expects the economy to expand by only 2.2 percent per year, adjusted for inflation. That’s only about two-thirds of the growth rate the United States has enjoyed since World War II. The International Monetary Fund forecasts somewhat lower growth through 2017, too.
This is not a terrible outlook, but it’s not a thrilling or reassuring one either. Several economists, notably the Nobel laureates Edmund Phelps and Michael Spence, have suggested that the United States has undergone a structural shift that will slow future improvements in living standards. Among the most common arguments are these: capital is not being employed in the most effective way; labor’s productivity cannot rise as quickly as it once did; and the United States is not as globally competitive as it once was.
But there is some reason for hope. The nation’s reaction to the global financial crisis and the Great Recession has included a rash of creative destruction in the public and private sectors. Though I would argue that spending by the public sector has been too constrained by politics, the regulatory changes put in place by government are real and are already helping to maintain financial stability. Government-sponsored enterprises like Fannie Mae are stronger than ever. And new investments in basic research and infrastructure, which had been lagging and neglected, could pay off handsomely in the long term.
Political grandstanding and fretting about the overall crisis have diverted the public’s attention from these important changes, and so their results could come as a surprise. Peter Blair Henry, the dean of the Stern School of Business at New York University (where I teach), recounts a similar story about Latin America in his new book, “Turnaround.” Expectations for growth in the region were low in the 1980s and 1990s, and East Asia was the focus of the financial markets. So when Latin America’s economic reforms began to take effect, investors were startled by the positive results.
The United States still has problems to resolve, but it is on a stronger economic footing than before the crisis. Recent upsurges in the stock markets suggest that investors may be starting to see this, too. When the economic shifts of the past several years start to pay off, we may just experience a turnaround of our own.