November 7, 2011
The worst of the financial crisis of the 2008-2009 time frame is history, and as the recovery progresses, I think it’s fair to say that we’re all wondering when everything will get back to the way it was … when will we have a low unemployment rate, a thriving manufacturing sector, a healthy construction industry, and so on? When will things get back to normal?
Hold on. We can’t answer that question until we’re sure what normal is. It would be easy to use the year before the financial crisis, 2007, as a benchmark, but that was a very good year for many in manufacturing, so that’s not realistic. Looking at the data over a span of several years, 2000 to 2008, provides a better idea of normal.
Now that we have a better sense of normal, when can we expect things to get back to normal? Actually, this is probably it.
First, our long-term growth trend has been slowing for some time. Our economy was relatively hot in the aftermath of World War II, but it has been cooling in recent decades. Gross domestic product grew 4.17 percent during the 1950s, and even faster at 4.44 percent during the 1960s. The oil shocks and recessions of the 1970s slowed the economy; it grew 3.26 percent in the 1970s and slower still, 3.05 percent, during the 1980s. The 1990s were slightly more respectable at 3.2 percent, but 2000-2010 brought a big change: the economy grew just 1.81 percent that decade.
Why? Well, the world is changing. Much of the world’s productive capacity was crippled by World War II, but the U.S. was untouched, so it was in great shape for a couple of decades. However, as time went on, knowledge and capacity spread, making the global marketplace much more competitive.
Two researchers, Ricardo Hausmann, director of the Center for International Development at Harvard University, and César A. Hidalgo, ABC Career Development professor, MIT Media Lab, MIT, recently collaborated to develop an index that gauges 128 economies’ levels of sophistication—knowledge and the means to use that knowledge for production.
“Our most prosperous modern societies are wiser, not because their citizens are individually brilliant, but because these societies hold a diversity of know-how and because they are able to recombine it to create a larger variety of smarter and better products.”
In their recent paper, “The Atlas of Economic Complexity,” the authors gauge an economy by its diversity, or the variety of products it generates. They also evaluate the products and determine how commonly or rarely the products are made in other countries. A country that makes few products that are available from many other countries ranks low on the complexity index; a country that makes many products, some of which are not easily made elsewhere, ranks high. The U.S. is in the top 13 countries in economic complexity.
However, many complex economies don’t have strong potential for future growth. In the authors’ projected growth per capita to 2020, the U.S. ranks 91. In fact, of the countries that rank in the top 10 for economic complexity, just two—Slovenia and Czech Republic—rank higher than 50 in potential for future growth.
If an academic paper that runs 360 pages isn’t to your taste, and if growth projections to 2020 are too abstract, you can take a look at predictions from the Federal Reserve Board and the Federal Open Market Committee. Their summary of projections to 2014 assesses economic growth, the unemployment rate, and inflation. They predict slow growth—less than 2 percent per quarter in 2011, less than 3 percent in 2012, and less than 4 percent in 2013—and an unemployment rate that doesn’t dip below 8 percent until 2013.