MW-DQ504_us_gro_20150721120632_ZH

By Jeffrey Bartash, Market Watch–

WASHINGTON (MarketWatch) — Millions of Americans who want a full-time job still can’t find still one. Worker paychecks are barely keeping ahead of inflation. And governments at all levels are struggling to prevent future costs from spiraling out of control.

All of these ailments can be traced to one malady: slow economic growth.

The U.S. is in a straitjacket. Sure, the economy has been growing steadily at a 2% clip since a recovery began in mid-2009. But the U.S. is expanding well below its historic growth rate of 3.3%. And it hasn’t topped the 3% mark in a decade — the longest barren stretch in modern times.

Politicians have taken notice. They’ve seized on the dull performance of the U.S. economy as they jockey to capture the White House in 2016. Republican contender Jeb Bush has publicly made the goal of a 4% economy the early rallying cry of his campaign.

Forget 4%. Virtually every economist of any political stripe says it’s an impossible dream. Most are doubtful the U.S. can regularly achieve 3% growth again. And even those who do disagree on what needs to done.

What’s at stake is the very future of America. Without faster growth the U.S. can’t create enough jobs for those who want to them, and Americans will have to get used to much smaller increases in their paychecks. The middle class could shrink and poor would be even worse off.

MW-DQ507_us_gro_20150721121222_ZH

Governments from Washington on down won’t be able to do much to cushion the blow, either. They’ll find it harder to balance budgets, pay bills, maintain entitlement spending and make badly needed investments in roads, bridges, scientific research and other endeavors critical to the economy.

Even maintaining the world’s most powerful military could be jeopardized.

“America would have to lower its sights,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “Over a long period

[slower growth] makes a huge different in incomes and living standards.”

The P factors of success

How fast an economy expands in the long run is a function of two simple things: population growth and productivity. Add up how much each one increases per year and that gives us a good idea of the U.S. economy’s growth potential.

Both have been slowing since the turn of the century, with ominous implications.

The slowdown in population growth is the easier one to understand. The baby boomers are retiring, birth rates have fallen and a weaker U.S. economy has caused many immigrants to return home.

“It’s a lot harder politically, in any country, to get a push for immigration when you have a large number of citizens who are unemployed.”

-Paul Ashworth
The number of people living in the U.S. increased just 0.75% in 2014, the smallest gain since World War Two and just half the rate compared to the early 1990s, Census figures show. The trend looks even worse for the working-age population.

The easiest way to increase population is to let in more immigrants, but the issue has become a lightening rod in Washington that’s resulted in a political stalemate.

“It’s a lot harder politically, in any country, to get a push for immigration when you have a large number of citizens who are unemployed,” Paul Ashworth, chief U.S. economist at Capital Economics, said in an interview. He recently wrote a paper about whether the U.S. can ever see 3% growth again. (The answer will come later.)

Another tack is to increase the percentage of able-bodied people 16 or older who are in the workforce. But the so-called labor force participation rate has been falling since the turn of the century and it recently touched a 38-year low of 62.6%. The decline won’t be easy to reverse.

Productivity puzzle

The dropoff in productivity — a trend that’s occurred worldwide — is a more daunting challenge. No one really knows why it has slowed.

Although the word makes a lot of people’s eyes glaze over, productivity is an economy’s secret sauce. All it refers to is how much an employee produces in an hour of work — how many restaurant customers are served, how many chickens are processed, how much software code is written, how many auto parts are made. And so forth.

MW-DQ505_econom_20150721120940_ZH

An economy’s long-term potential is tied to increases in productivity and population growth. The trend in the U.S. since the mid-2000s has not looked good. Ignore the big gains in 2009 and 2010 – companies boosted productivity by cutting millions of workers and making remaining employees do more.

The payoff from higher productivity is huge. It means businesses earn greater profits. It means companies can afford to pay workers more without increasing costs. It means firms have a bigger advantage and more staying power over less productive rivals.

Richer countries, in short, are more productive than poorer ones.

Long-run prosperity under more threat than ever

Throughout its history, the U.S. has been a productivity powerhouse. The amount of goods and services produced by American workers increased by a healthy average of 2.7% a year since 1948. It even grew by a whopping 3.3% annually from 1998 to 2005.

Yet productivity began to slow about a decade ago and it’s grown by a meager 0.6% annualized average in the past 21 quarters.

“That’s a scary number,” said Gad Levanon, managing director of economic and labor market research at the Conference Board. “Productivity has never grown that slowly.”

Economists offer a variety of explanations.

Many companies have shifted research and development overseas or they are investing less aggressively in the United States. The rate of investment in software, computers and similar technology, for example, has nosedived over the past decade.

The number of new companies started each year in the U.S., what’s more, has fallen dramatically since the late 1980s, depriving the economy of a critical source of productivity-boosting innovation. The White House on Tuesday announced several initiatives designed to kickstart enterpreneurship.

Cash-strapped state governments and a heavily indebted federal government, for their part, are not spending as much on public works that make it faster or cheaper to transport goods, connect with customers and so forth.

Some pessimists even predict the U.S. will have to get used to being less productive.

Professor Robert Gordon of Northwestern famously and controversially issued a paper in 2012 arguing that the U.S. has already reaped most of the benefit of the great inventions of the past. Newer innovations are less likely to give the economy as big a burst of productivity gains.

Dimmer future

Whatever the case, the U.S. can’t afford to stand pat.

Private economists and the Federal Reserve predict sub-3% growth over the next three years. Looking beyond, the nonpartisan Congressional Budget Office predicts the economy will expand by an average of just 2.1% through 2025.

“I am not going to say we can’t get to 3%,” said John Silvia, chief economist at Wells Fargo and a former senior economic advisor in the U.S. Senate. “But 2% to 2.5% is probably the best bet, at least for the next few years.”

The damage to American workers might not be so bad as long as the economy produces enough jobs to keep up with slowing population growth. The retirement of baby boomers will also open up more jobs for younger people. Most workers just shouldn’t expect big raises every year and they’ll have to save more for retirement.

The danger to Washington is that it won’t be able to raise enough money to cover the cost to run the federal government. Lawmakers would be forced to cut spending, raise taxes, trim entitlements or do all three to prevent an already large national debt ($18 trillion) from getting further out of hand.

All of those things could further shackle the economy and raise social tensions. Various groups would be pitted against each other — young vs. old, veterans vs. civilians, whites vs. minorities — as they fight to maintain their share of a shrinking federal pie.

Looking for solutions

What can be done to boost growth?

Economists and business leaders say a major overhaul of the corporate tax code that simplifies and reduces rates would make American companies more competitive and encourage foreign firms to set up shop in the United States.

Others call for more scrutiny of regulations to weed out outdated, unnecessary or counterproductive laws that discourage new businesses from forming or drive them out of the country.

“The U.S. needs to take a hard look at tax and regulatory policy to see what can be done to make sure more stuff is made here instead of the rest of the world,” contended Steve Blitz, chief economist at ITG Investment Research. “Why shouldn’t Nike be making shoes in central Los Angeles?”

Yet the reality is that regulators and many politicians often make it harder for companies to succeed in the U.S., especially if they introduce new products or services that get around old laws or threaten powerful political constituencies.

Just look at Uber .

The six-year-old company has revolutionized car service and is eviscerating the traditional taxi industry with cheaper prices and more flexible passenger travel, angering mostly Democratic politicians from New York City to San Francisco. Even Democratic presidential front-runner Hillary Clinton fretted about Uber in her first major speech on the economy.

They charge that Uber skirts safety laws, avoids licensing fees, pays its drivers less than taxi operators and adds more congestion to already busy roads. And they’ve put up obstacles to retard its growth.

“The fundamental challenge of innovation is that it upsets the status quo,” Silvia said. “We see the jobs that exist. We don’t always see the new jobs or benefits right away.”

More investment by the government and private sector in the arteries of the economy such as transportation, communications and energy would also speed up growth, economists generally agree.

Will any of these potential salves be applied? Certainly not until the next presidential election is over. Even then there’s no guarantee. A fresh wave of legal immigration is a nonstarter, government budgets remain under pressure and Washington is as divided as ever.

Both Democrats and Republicans, for instance, agree corporate tax reform could make America more competitive. But that’s all they can agree on.

“Everyone agrees it’s terrible but no one ever does anything to fix it,” said Stanley, who contends that Washington has been “unfriendly to growth” since the U.S. exited recession six years ago.

Which brings us back to Paul Ashworth’s question as to whether GDP growth will ever hit 3% again. His answer is not comforting.

“The bottom line is that even 3% economic growth is likely to be a rare event in the future,” he wrote in his report. “Four percent growth will be about as common as unicorns.”