Why do so many Americans feel dissatisfied about the economic state of their nation? One simple chart offers a lot of insight.
Economists measure standards of living in many ways. Among the most common is to look at the change in the value of goods and services produced by a country, adjusted for inflation and for population growth. This measure, known as per capita real gross domestic product, essentially shows how much income the average person is generating.
The chart below shows the cumulative growth in per capita real GDP in the U.S. over the preceding ten years, for each year from 1957 to 2015. It does a great job of depicting the country's post-World War II macroeconomic experience.
I see four important points.
- Growth was unusually strong in the 1960s and early 1970s. In every year from 1966 through 1973, per-capita income was up between 30 percent and 40 percent from a decade earlier. Thus, it's not surprising that many Americans recall this as a great period for the nation’s economy.
- In every year from 1984 to 2007 -- a period that economists call the Great Moderation, because of the way both growth and interest rates stabilized -- per-person income was up between 20 percent and 30 percent from a decade earlier. That's ample reason for Americans to view this as a good period for the economy.
- Cumulative per-person growth from 2005 to 2015 was lower than in any prior decade in the sample. That certainly helps explain why many Americans are unhappy with the nation’s recent economic performance.
- Although the experience of the last few years may make it seems as though the U.S. will be stuck with low growth forever, the good news is that the country has recovered from such slumps in the past. Cumulative growth per person was just a bit above 10 percent from 1951 to 1961 and again from 1973 to 1983.
What, if anything, can the government do to make turnarounds in growth possible? Some economists would say nothing. They believe that longer-term prosperity is the product of innovation changes and labor force demographics that are largely beyond the influence of macroeconomic policy.
By contrast, I would argue that monetary policy can affect growth. The slump from 1973 to 1983 had a lot to do with the efforts of Paul Volcker, then chairman of the Federal Reserve, to bring inflation under control. Conversely, the Fed's willingness to allow high inflation contributed to the rapid growth of the late 1960s and early 1970s. The Great Moderation is, not surprisingly, associated with relatively stable inflation.
The Fed has played a big role in the poor performance of the latest decade as well. It has actually been tightening monetary policy for most of the past four years, even though inflation has been below its 2 percent target. In other words, the central bank is not pursuing a pro-growth agenda.
Americans are right to want better performance than they've seen in the past ten years. The Fed can’t make that happen on its own -- it needs the help of Congress, which has the power to accelerate growth by boosting spending on infrastructure and by incentivizing private sector investment. That said, we can’t have faster growth without a central bank that is a lot more willing to be supportive.
Narayana Kocherlakota is the Lionel W. McKenzie professor of economics at the University of Rochester. He served as president of the Federal Reserve Bank of Minneapolis from 2009 through 2015. To read more of his insights, GO HERE NOW.
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