Harvard Professor’s View of a Sick Economy

If you were to view the current economic situation through the lens of a medical doctor, you might see that the patient’s illness fails to offer an obvious diagnosis. At least that’s the view that N. Gregory Mankiw, professor of Economics at Harvard University, describes in last week’s New York Times.

He writes that if you had to choose one statistic to gauge an economy’s health, it would be total (inflation-adjusted) income produced within an economy (GDP). And here in the U.S., this statistic is causing some aches and pains. Mankiw points out that, over the last decade, GDP growth per person has averaged only 0.44% (which would take about 160 years to double). The historical norm for GDP growth, on the other hand, is 2.0% (which would take 35 years to double).

The professor outlines several current theories:

A statistical mirage: The national income accountants who calculate GDP might “underestimate how much life is getting better.” Mankiw uses the example of how a single smartphone now eliminates the need for a camera, GPS, music system and various other devices.

Hangover from the recession of 2008-2009, during which many feared another Great Depression would follow. While it didn’t, lingering anxiety could have caused businesses to avoid borrowing money to finance risky investments (and banks reluctant to finance them).

Secular stagnation, defined as the persistent inability of the economy to generate sufficient demand to maintain full employment. Mankiw cites a suggestion made by Lawrence H. Summers, former economic adviser to President Obama, that “the government take advantage of lower interest rates to make the right investments in public capital” in order to promote employment in the short run and make the economy more productive in the long run.

Slower innovation, the most pessimistic of the theories, which says the pace of innovative activity has declined. That is, this generation’s inventions (i.e. the smartphone and social media) are not as life-changing as, say, electricity, indoor plumbing and the internal combustion engine.

Policy missteps: When President Obama took office, his administration’s first economic policy initiative was a stimulus package to boost the economy out of recession. When things improved, it then supported tax increases to shrink the budget deficit.