U.S. Economic Growth Over the Past Ten Years

March 27, 2015

While faster than growth in Japan and the eurozone, U.S. growth during the past decade was considerably slower than in the prior ten-year intervals.  Nine consecutive calendar years have now passed without any showing average real GDP growth of as much as 3.0%.  The averages in the most recent three years — 2.3% in 2012, 2.2% in 2013, and 2.4% in 2014 — exhibit little upward momentum.  Real growth between the fourth quarters of 2004 and 2014 averaged 1.6% per year, just half as much as the 3.3% pace between 4Q94 and 4Q04.  The decade through the last quarter of 2004, moreover, experienced very similar growth to that between 4Q84 and 4Q94 of 3.1% and that covering the decade through 4Q84 of 3.3%. 

Nominal growth during the last ten years was likewise an outlier.  Such averaged 3.5% per year, down from rates of 5.3% in the year to 4Q04, 6.1% in the decade to 4Q94 and 10.0% in the ten years to 4Q84.  The 10% pace was too high, but 3.5% set against a 2.0% definition of price stability is too little.  The fact is that 10% nominal growth between 4Q74 and 4Q84 allowed 1.7 percentage points of more annual real economic growth than the 3.5% per annum nominal GDP growth experienced in the most recent decade. 

I point these comparisons out not to argue that it was right to fight the earlier period’s inflation.  The main problem with that episode of price instability was not so much that inflation was too high but that it was accelerating and therefore an unsustainable state of affairs.  Price stability is an intermediate goal, that is a condition that helps to promote faster real economic growth and longer periods of expanding activity.  The goal of growth is a final one, sought for its own sake, but an even purer objective is growth per capita because that speaks not only to the production of more stuff but to how things made get distributed.  It so happens that the distribution of GDP is becoming polarized more quickly now than it did in the decade to 4Q84.  Considering the whole inflationary episode of 1974-1984 — problem grows and then is addressed — and comparing that to the last ten years during which a problem of an entirely different sort developed, grew out of control and then was addressed — the facts support the view that people were better off then than now.  That’s not a typical perception.  Rather to this day the 1970s and early 1980s carry an enormous stigma of macroeconomic mismanagement.  In fact, growth was considerably faster in the earlier episode.  Economic imbalances were fixed more compellingly.  And a greater cross-section of households shared in the net economic growth of the earlier period than the more recent one.

A debate that is heating up and likely to persist as the Federal Reserve attempts to return to positive short-term interest rates is whether is will be more costly to act more aggressively than the idea or less aggressively with respect to the timing of the first policy tightening and the speed of rate hikes thereafter.  Permitting more inflation than desired can always be fixed.  We’re learning painfully that letting inflation fall too low leads to circumstances that are much more resistant to macroeconomic countermeasures.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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