- "For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different. The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation's growth."
- —Washington Post (January 2010)1
America has the largest and most productive economy in the world. Yet something feels terribly wrong.
It's not just that millions of Americans remain out of work. It's also that income and wage growth have been stagnant for many for much of the last decade, while our job security seems far more uncertain and our job opportunities seem more limited.
Amid these labor market uncertainties, our capital markets have likewise been in crisis. It's not just that millions of American stock market investors have lost trillions of dollars. It's also that our faith in our financial markets and institutions has been shaken to the core—even as the financial crisis cost many innocent bystanders their jobs.
The past decade has been particularly unsettling for a generation of Americans raised on Wall Street's doctrine of "buy and hold." Indeed, our financial advisors assured us that all we had to do was buy and hold a portfolio of stocks representing the broad U.S. stock market, and we would have more than enough to retire on. Yet an American dollar invested in a mutual fund holding the Standard & Poor's 500 stock market index at the beginning of the appropriately named "nought decade" of the 2000s was worth only 90 cents at the end of the decade.
In these unsettling times, the central conundrum we now face is that America's once-robust and vibrant economy appears to many to depend on an unprecedented, massive, and totally unsustainable monetary and fiscal stimulus just to achieve modest growth rates and relatively small reductions in a persistently high unemployment rate. One very clear and present danger is that these massive stimuli—and the massive government debts that come with them—will force us down the road to confront very unpleasant choices and trade-offs among fiscal priorities ranging from education and national defense to Medicare, Social Security, homeland security, and the provision of critical infrastructure. These massive stimuli may also possibly reignite inflation in the midst of America's underperforming growth rate.
Under this cloud of uncertainty, the central policy question now facing the nation is this: How can America reharness the vibrant productivity growth of the private sector and resume its journey on the path of long-term prosperity? In order to answer this question—and thereby make things right—we first need a much better understanding of just what has gone wrong.
The first diagnostic tool we will use is the GDP Growth Drivers equation, which is a simple but very powerful representation of how all nations grow their economies. Using this diagnostic tool, we will see that after more than a decade of failure of our fiscal, monetary, and trade policies, the American economy has been saddled with major structural imbalances in all four of its growth drivers that are now stalling our economy. We as a nation are simply saving too little and therefore are investing too little in the primary engine of job creation—the private sector. We as a nation are also spending far too much of our wealth on government while chronic trade imbalances have left us severely weakened.
The GDP Growth Drivers Equation
The Gross Domestic Product, or GDP, is what economists use to measure the growth of any nation. The beauty and simplicity of the GDP Growth Drivers equation is that it illustrates that a nation's economic growth is driven by only four factors. It may be written like this:
GDP = Consumption + Business investment + Government spending + Net exports
In this equation, "net exports" represents the difference between what a country exports to, and imports from, the rest of the world. It is important to understand up front that by the simple arithmetic of this equation, if a country such as the United States runs a trade deficit, its net exports will be negative, and its rate of GDP growth will be lower than it otherwise would be.
More broadly, using the construct of the GDP Growth Drivers equation allows us to very precisely diagnose why America is now facing a decade of slow growth and high unemployment. As we will see, all four American drivers of GDP growth have effectively run off the road—or, perhaps more accurately, been stalled by policy failures. Let's start our diagnosis, then, with a brief overview of the GDP itself.