Ronald Reagan once said that there are “no great limits to growth because there are no limits of human intelligence, imagination, and wonder.”
The truth to that statement is currently being put under the microscope in the US as an emerging view is taking shape that America’s weak recovery is due to much more than the recession and that a bounce back to pre-recession levels of growth is old-world thinking.
Bright minds like the Congressional Budget Office, the nonpartisan arm of Congress, and former Treasury Secretary Lawrence Summers have put forward a view that the potential output of the US economy is probably 5 per cent lower than prior to 2007 in what Summers called “a sustained, long-term” shift.
It is a view at odds with the Obama Administration, which argues that the sluggish rate the economy is growing at (2.4 per cent for the last three months of 2013) will continue to ramp up.
"Many of us hoped that this will be the year (of faster US growth). But we cannot take it for granted yet," Summers said. "The last couple of months' data for the US were not what we wanted them [to be].”
The theory of Summers and others is that the recession has in fact masked troubling economic signs which indicate that America will not be able to output as much as it has in the past.
Douglas Elmendorf, Director of the Congressional Budget Office, said the downgrade in forecast growth is due largely to economic trends that preceded the financial crisis.
They include the fact that as Americans get older fewer of them are working.
The labour force participation rate stood at 63 per cent last month, which is close to a 35-year low. What’s more, it is down from 66 per cent before the recession began and is projected to decline to 60.9 per cent by 2024.
Also, now that women have managed to elbow their way into the workforce their participation will begin to copy “what the male rate has been doing for a decade.”
“This is a reassessment, from our perspective, of what the underlying growth rates in key variables of the economy are,” Elmendorf said at a policy conference in Virginia.
A permanent growth plateau is a terrifying thought for an economic system that measures its success on how much it is churning out.
Well-known economist Robert J. Gordon has long put the case that American innovation may have reached its peak in terms of its ability to drive the economy.
In a National Bureau of Economic Research paper released last year he states that the US faces six headwinds that will drag down long-term growth to half or less of the 1.9 per cent annual rate experienced between 1860 and 2007.
He believes demographics are changing under the influence of challenges in the fact that fewer Americans are working, education, inequality, globalisation, energy/environment, and the overhang of consumer and government debt.
“There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely,” he says. “The rapid progress made over the past 250 years could well turn out to be a unique episode in human history.
Gordon says the record price of education, massive debt and costly environmental regulations will hit growth. He also believes that increased globalisation will result in stagnant US wages as occupations that are more exposed to competition from low wage nations (such as jobs in textile factories) see slower relative wage growth.
Then there is income inequality.
“Growth of income of the bottom 99 per cent (of Americans) has been half a point smaller than the average,” he says. “All the rest went to the top 1 per cent. For most of us, current growth is 0.8 per cent.”
And while noise around a permanent state of impaired growth gets louder fewer Americans are saving money compared to four years ago.
A survey from the non-profit Consumer Federation of America found that only 68 per cent of all Americans are spending less than they earn and saving the difference. That’s down from 73 per cent in 2010, the first full calendar year after the recession ended.
Fewer households (64 per cent) are putting away emergency funds for a rainy day, down from 71 per cent in 2010, and fewer Americans are reducing their debts (76 per cent compared to 79 per cent in 2010).
If the brakes are put on growth it means jobs will be lost or that no new jobs will be created. Consumers will also spend even less money than they are now. Couple that with the fact that Americans have very little squirreled away and it paints a potentially bleaker picture for the future than what occurred at the height of the recession.
There are many who, like Reagan, feel that humans will always be able to innovate and in turn make money from those ideas. But will it be on a scale to continue the US's love affair with all that comes from economic growth?
Mathew Murphy is a Walkley Award winning journalist based in New York.
That looks set to be the growing problem for America.