BOHANON & STYRING: Our robust growth isn’t sustainable without fundamental change

August 24, 2018

Economic Analysis by Cecil Bohanon & Nick CurottGross domestic product increased at an annual rate of 4.1 percent in the second quarter, the fastest pace since 2014. And unemployment is at 3.9 percent, among the lowest rates since the 1970s. Small-business optimism is historically high, and consumer sentiment is at a 15-year peak. This is all good news.

However, for much of the 20th century, annual GDP growth averaged 3.5 percent. In recent decades, it declined to about 2 percent. Is the current GDP growth the beginning of a new period of robust 20th-century-like growth? Or simply a one-time growth spurt that will revert to the anemic growth of recent decades?

Low growth portends disaster: It will force drastic reductions in Social Security and Medicare benefits, it will likely lead to a public debt crisis, and it will greatly exacerbate the problem of economic inequality. Slow growth lies at the heart of our current social strife and partisan political squabbling. Fixing the growth problem is of utmost importance. Prosperity cures all manner of ills.

The causes of growth stagnation are varied. The size of our workforce is compromised by an aging and slower-growing population. A declining willingness of workers to move from stagnant areas to booming parts of the country also crimps growth, and welfare policies that discourage work don’t help, either.

Labor productivity growth, even in the current boom economy, is still low—about half the rate it was for most of the 20th century. Causes include low capital investment, an underperforming educational system and fewer entrepreneurs creating new businesses.

It is possible to get economic growth back on track. Many factors matter, but we think improving economic freedom—our nation’s adherence to the rule of law, protection of private property and limited government—is a key to restoring robust growth.

According to the Frazier Institute’s measure of economic freedom, the United States placed fourth among all countries in 2000 with a score of 8.62; today, it has slipped to 11th place with a score of 7.94. More economic freedom creates more incentive for individuals to start and invest in businesses, get a better education, and work hard.

Today’s strong economy might have less to do with Trump’s policies than with an economy that’s at a short-run business-cycle peak. There are deep-seated economic problems that threaten the long-run health of the economy. Now is the time to address these problems, before the next recession sets in.•


Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.


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