The Difference an Additional 1% in U.S. Economic Growth Would Make for Future Americans is Tremendous

What's the effect of whether the U.S. economy grows at either 2% or 3% annual real economic growth rate? While it may seem like a relatively small difference of 1%, it's not small at all. In fact, it's actually 50%.

And 50% greater growth would make a huge difference to the living standards of future Americans over a long period of time. Low unemployment and higher wages and salaries combined with a stronger, more informed and more stable and secure opportunity society, for starters.

But now let's focus on the growth rate itself and why we need to get back to 3% instead of the 2% path we're following. What a difference 1% makes, in other words.

First, some history. From 1947 to 2008, the U.S. economy grew at an annual inflation adjusted rate of 3.3%. Most forecasters today estimate growth in the foreseeable future at 2.3% annually. That's a 1% negative variance compared to the growth rates of the past 60 years.

This estimated slowing is in large part demographics --- we're getting older as a society as baby boomers retire. Another is the fact that we experienced outsized growth after World War II due to the fact that we were producing 50% of the world's output at that time. Since then, of course, other economies have grown and formerly closed markets have opened up. Global competition has become a stark reality. But it presents an opportunity for us, too. More worldwide consumers.

Partly as a consequence of this new global competition, since 1974 the inflation adjusted income of U.S. high school graduates has fallen from $42,000 to $32,000 in 2010. And similarly, our educational lead has disappeared over many other countries, thus making the middle class standard of living problem even worse.

However, we don't have to settle for an ongoing slow growth economy. We need 3% and we need to resolve to take the steps required to achieve it.

Obama the Dealmaker discusses the need for politicians to come together and make a bipartisan and serious effort to help our economy recoup that lost 1%.  Here's what it recommends that President Obama and Speaker Boehner do to assure that we get back to a 3% annualized real rate of growth:

"The liberal left wing, like the Tea Party types, has an incentive to build television ratings by fulminating against their foes. But President Obama and John Boehner have an incentive to create a low-decibel businesslike atmosphere. The opinion-entertainment complex longs for the war track. 

The practitioners should long for the deal-making track.

Before he gets lost in the mire of negotiations, the president could step back and practically describe the task ahead. Between 1947 and 2007, the U.S. economy grew an average of 3.3 percent a year. But over the next few decades, according to forecasts from the Congressional Budget Office, it’s projected to grow only at 2.3 percent per year. The task ahead is to make the sort of structural changes that will get America back on its old growth trajectory....

Some of the things on the to-do list are things Democrats relish doing: investing in infrastructure and basic research; reforming immigration to attract global talent; investing in student loans and community colleges; trimming the annual $1.1 trillion in tax loopholes, many of which go to corporations and the rich.

Other things the Republicans will surely relish doing: simplifying a tax code that has bloated to 74,000 pages; streamlining the Code of Federal Regulation that has metastasized to 165,000 pages; slowing entitlement spending.

But the point is the only way to get things done in a divided polarized country is side by side — an acceptable Democratic project paired with an acceptable Republican one.

The fiscal-cliff talks are just the first chapter in this long process. In this first episode, the Democrats should get higher revenues from the rich (elections have consequences) and the Republicans should get some entitlement reform. But the main point is to lay the predicate for the bigger deals to come.

This is about horse-trading. It’s about conducting meetings in which people don’t lecture each other; they deal. It’s about isolating those who want an economic culture war. It’s about making clear offers and counteroffers.

If you want a great example of how these deals might work, check out a new paper at Third Way called The Bargain. It offers a perfect model of how you might structure a series of big trades to move the country back on the growth path — on innovation policy, tax policy, spending policy and so on."

SUMMING UP

There's still plenty of time to get our financial act together as a nation. So let's do it.

Returning to a 3% growth rate certainly isn't an impossible goal, but it will require a somewhat bipartisan and even cooperative approach in Washington.

What's at stake? Well, I recommend that you click on "The Bargain" referenced above and see for yourself how much difference 1% can make, including suggestions as to how politicians can help make it happen by working together in a common sense way.

Perhaps I'm being naive, but my bet is that there's a "grand bargain" going to be made in 2013 to enable our U.S. economy to recapture that "missing 1%" over a reasonable period of time.

And 3% real growth compared to 2% will make all the difference in the world to the economic well being and national security of future generations of Americans and America, respectively.

Thanks. Bob.