14 THE BiG DROP
“sub-normal” activity. In other words, it’s entirely possible to
have growth in a depression. The problem is that the growth
is below trend. It is weak growth that does not do the job of
providing enough jobs or staying ahead of the national debt.
That is exactly what the U.S. is experiencing today.
The long-term growth trend for U.S. GDP is about 3%.
Higher growth is possible for short periods of time. It could be
caused by new technology that improves worker productivity.
Or, it could be due to new entrants into the workforce. From
1994 to 2000, the heart of the Clinton boom, growth in the
U.S. economy averaged over 4% per year.
For a three-year stretch from 1983 to 1985 during the heart
of the Reagan boom, growth in the U.S. economy averaged
over 5.5% per year. These two periods were unusually strong,
but they show what the U.S. economy can do with the right
policies. By contrast, growth in the U.S. from 2007 through
2013 averaged 1% per year. Growth in the first half of 2014
was worse, averaging just 0.95%.
That is the meaning of depression. It is not negative
growth, but it is below-trend growth. The past seven-years of
1% growth when the historical growth is 3% is a depression
exactly as Keynes defined it.
Pundits point to 4% GDP growth in the second quarter of
2014 as proof that the economy is expanding robustly. Talk
of depression seems confusing at best and disconcerting at
worst. But second-quarter growth was driven by inventory
accumulation, which adds nothing to GDP in the long-run.
When inventories are converted to final sales, U.S. growth
was only 0.65% in the first half of 2014. That is not a pace
that will sustain an economic recovery.
Other observers point to declining unemployment and ris-
ing stock prices as evidence that we are not in a depression.
They miss the fact that unemployment can fall and stocks can
go up during a depression. The Great Depression lasted from