The Fed sees years of slowing growth. Prepare for years of political turmoil.

Larry Kummer, Editor

8 years ago

Summary: Slowing economic growth and rising inequality are the unmentioned elephants in Campaign 2016. While inequality gets the headlines, slowing growth is more important. The Fed forecasts show that they see it. Do we? Are we preparing for the resulting political or social turmoil, or trying to restart the engines of growth? Time is not our friend. {1st of 2 posts today.}

“Our real problem, then, is not our strength today; it is rather the vital necessity of action today to ensure our strength tomorrow.”
— Eisenhower’s State of the Union address on 9 January 1958.

We imagine that we’re fast. That’s no longer true.

Today the Fed released the governors’ and presidents’ new forecasts of economic growth (real GDP). Here we see one of the primary forces driving Campaign 2016, one almost invisible to well-paid journalists and political gurus — but obvious to most Americans. Look at how their expectations for each year’s growth have shrank over time. Real GDP grew 2.4% in 2014 and 2015.

In Sept 2013 the Fed expected 2016 GDP growth of 2.5 – 3.3%; they now expect 2.1 – 2.3% (note the large drop in the high end forecast).
In Sept 2014 they expected 2017 growth of 2.3 – 2.5%; they now expect 2.0 – 2.3% (just starting its long slide).
In Sept 2015 they expected 2018 growth of 1.8 – 2.2%; they now expect 1.8 – 2.1% (the most distant forecasts fall slowly).
In Jan. 2011 they expected long term growth of 2.5 – 2.8%; they now expect 1.8 – 2.1% (note the large drop in the low end forecast).

This has been pattern for economists’ forecasts since the crash: optimism about the future several years out, with each year’s forecast slowly ratcheted down as the grimmer truth becomes obvious — to be replaced with new optimistic forecasts about the distant future. Worse still is the fall in expectations for long-term growth — the great background against we shape our plans.

Perhaps the most important measure of growth is that of real per capita personal income. This is national power in its purest form. Our memories of good and bad decades do not well match the facts. Rather we have had a long slide down, slowing growth, decade after decade. For more information see the interactive graphs at the Regional Economic Analysis Project (REAP). The bottom line…

1960-69: 3.5% — The golden years,
1970-79: 2.3% — The terrible 1970s (not so terrible).
1980-98: 2.2% — The Reagan Revolution (Tax cuts! Didn’t work!),
1990-99: 2.0% — The tech boom (Didn’t work, even before the bust!).
2000-09: 1.2% — The Bush Jr. years (Tax cuts! Didn’t work!),
2010-14: 1.4% — First half of the Obama years (Small uptick from the recovery and partial reversal of Bush Jr. tax cuts).

We have tried various nostrums to restore growth; none have worked. Worse, these are mean growth rates. Median income growth is much lower — less affected by rising inequality (as the 1% skims off more and more) and so better reflects life for average Americans.

Look to the futures shown on the graph below. America’s fate depends on which line we take. The top line means prosperity, if equitably distributed. The bottom line (secular stagnation) probably means a new America will arise, especially if unequally distributed (i.e., like the past 40 years, with most Americans’ real income stagnant — and some getting much less).

Forecast of US GDP Growth. By Robert Gordon of NBER, 2015.

Conclusions

This is the economic reality driving Campaign 2016, as Trump and Sanders break from the stagnant orthodoxies ruling both parties. One populist, one progressive — with large differences between them (e.g., racism, nativism), and a large overlap. Both advocates of radical change. Perhaps neither offers effective solutions. But more of the same policies that ruled for the past several decades almost certainly means more slowing.

Perhaps journalists and political gurus will stop chattering about the sound bites and election-as-a-horse-race, and instead look at the changes driving the Trump and Sanders revolts. Whatever the outcome in 2016, these forces will not disappear. If income growth is not restored and income inequality not restrained, the step beyond political turmoil will be social turmoil. Expectations for growth is a thread that holds together America society. Broken, the unleashed resentments and anger will reshape our so-far placid politics.

Just as the populist and progressive resurgence was not predicted but obvious in hindsight, the outbreak of social unrest will be unexpected — and seen afterwards as the inevitable result of our complacency and folly.