The Deep Causes of Today’s Struggling U.S. Economy

Issue Briefs | Economy

No. 196
Monday, July 11, 2016
by Ryan H. Murphy

The American economy is growing. But compared to other recessions in the post-World War II era it has not bounced back to its long-run trend. Optimistically, if real gross domestic product (GDP) per capita were following its 1990-to-2007 trend path, it would have hit $58,000 in 2015. Instead, it remained at $51,000.

Differing Explanations for Slow Economic Growth. Conservatives and progressives have their own narratives about why this is happening. Progressives have argued that the problem is still somehow a lack of nominal spending, even though the world we are in is “the long run” and the unemployment rate is precisely where one would expect it to be, 5 percent.

Conservatives blame the policies of Barack Obama, even though the policy changes put into effect are relatively small, given the size of the welfare state and the morass of federal regulations. Whether the top
marginal tax rate is 43 percent or 37 percent has economic effects, but the change must be contextualized. In 1960, the top rate was 91 percent.

Economic Freedom and Growth. Certainly, departures from the free market model have not had a beneficial impact on the U.S. economy. The issue is relative magnitude. According to the Economic Freedom of the World report, which measures the quality of free market institutions on a 10-point scale, the United States’ economic freedom score fell during the first few years of the Obama administration, from 8.11 in 2008 to 7.76 in 2010.1 It has been approximately stagnant through 2014, for which its preliminary score is 7.75.

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