America is struggling with economic rot

The Great Recession, and the financial crisis that preceded it, were such enormous and terrible events that they occupied most of our economic thinking for a decade. But now that the smoke has cleared and the economy has returned to a semblance of normality, we’re starting to think more about long-term trends. And evidence is mounting that the Great Recession may have drawn attention away from a slow rot that has been eating the US economy since the turn of the century.
Some of the top macroeconomists in the business have a new paper that reaches this conclusion. In “The Disappointing Recovery of Output after 2009,” John G. Fernald, Robert E. Hall, James H. Stock and Mark W. Watson break down the declines in growth and employment into a structural, long-term component and a short-term part related to the crash. That’s an inherently hard thing to do, since there’s no universally accepted theory of how recessions work. But Fernald et al. use two accounting methods, and find basically the same thing — although the recession hurt the economy a lot, it happened to coincide with two trends that were slowly eroding the US’s fundamentals.
Those two trends are slowing productivity and reduced labor-force participation. Slow productivity growth is hardly news — Bloomberg View recently ran a whole series of articles about the phenomenon. This unhappy trend appears to have begun three years
before the financial crisis.
As for labor-force participation, this has been falling since the turn of the century, though the last two years have seen a small uptick:
Both of these trends might have been exacerbated by the Great Recession. That economic disaster caused businesses to stop investing, which may have deprived them of the technology needed to increase productivity. Workers thrown out of employment by the recession might have seen their skills, connections and work ethic degrade, preventing them from going back to work even after the economy recovered.
But neither of these effects explains the 2000s, when these negative trends were getting started despite a healthy economy. The years before the recession also saw other disturbing developments. For example, the rate of high-growth startup formation fell during that period. As economists Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda point out.
The evidence suggests that in High Tech, high-growth young firms play an especially critical role in job creation and productivity growth…However, since 2000 the High Tech sector and publicly traded firms have exhibited a decline in dynamism. The number of IPOs has fallen in the post-2000 period, and those that have entered have not exhibited the same rapid growth as earlier cohorts.
The bursting of the tech bubble in 2000 undoubtedly had a lot to do with this. But the worry is that the tech sector, which boomed in the 1990s and drove strong productivity gains through the middle of the 2000s, is now on the same path of falling
dynamism displayed by US
industry in general.
The US manufacturing sector also slowed markedly after 2000. Industrial production in manufacturing grew robustly in the 1980s and 1990s, despite competition from the likes of Japan, Germany
and Southeast Asia. But since the turn of the century, the sector’s growth has been
almost nil.
Manufacturing has tended to be the driver of US productivity growth, so its stagnation could also be a sign of
something wrong with the economy.
Taken together, this evidence hints that some sort of long-term rot is afflicting the U.S. economy. What could it be? One candidate is the increase in industrial concentration — greater monopoly power might be holding back productivity and reducing employment. Other hypotheses abound — creeping regulation, a slowdown in scientific progress, Chinese competition, or the ephemeral nature of the internet economy. Some have even blamed video games for luring young men out of the labor force.
But whatever the cause, the implication is clear — the U.S. needs to put the Great Recession behind it. During the downturn, it made a certain amount of sense to ignore those who called for structural reform of the U.S. economy — after all, there were more pressing, immediate issues to deal with. But now that the recession is long over and slow growth seems to be here to stay, economists and policy makers should put much greater focus on raising productivity growth and getting more Americans into the workforce. Rooting out Amerisclerosis won’t be easy, but it has to be done.

— Bloomberg

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinio