It is with some trepidation that we contribute to a symposium on the future of the economy. The future is inherently unknowable. Although the laws of economics are universal, the institutional environments within which they operate dictate economic outcomes. Thus, any prediction about the future is ultimately a prediction about institutional evolution. Formal institutions are often shaped by political decisions, and those political decisions are shaped by broader cultural forces. We do not have a comparative advantage in forecasting political or cultural evolution.
Our goal here is more modest. First, we outline where the economy is today and why it is behaving as it is. Next, we project current economic policy into the future and find it unsustainable. Thus, some evolution of policy and institutions is inevitable. Our final section speculates on the forms that evolution might take.
The New Normal
The U.S. recession officially ended in June 2009 (Business Cycle Dating Committee 2010). Yet since the end of the recession, annual growth in gross domestic product (GDP) has averaged only 2.2 percent (U.S. Bureau of Economic Analysis 2015). Meanwhile, unemployment has averaged a little more than 8 percent, and even this percentage understates the problem because many are underemployed or have dropped out of the labor force altogether (U.S. Bureau of Labor Statistics 2015).
The working-age population of the United States has grown by roughly 51 million people since 1994, yet we have added only 21 million jobs. The remaining 30 million people either have left the workforce altogether or are categorized as "underemployed," "discouraged," or "marginally attached to the work force" (U.S. Bureau of Labor Statistics 2015).
This sluggish economy contrasts sharply with the U.S. economic performance in the twenty years prior to the recession. During that time, the economy expanded by 75 percent, growing at a real annualized rate of 3.0 percent (U.S. Bureau of Economic Analysis 2015). Over the same period, roughly 63 percent of the U.S. labor force was employed. Since the end of the recession, that number has dropped to 59 percent. (1)
The U.S. economy's poor performance is no longer related to our most recent business cycle. It instead reflects the type of long-run growth that can be expected due to our decreased economic freedoms. The Economic Freedom of the World Annual Report is the best measure of economic freedom available. It measures thirty-one variables across five broad categories: size of government; property rights; sound money; freedom to trade internationally; and regulation of credit, labor, and business (Gwartney, Lawson, and Hall 2014).
The United States ranked in the top four in the world in every year economic freedom was measured between 1970 and 2000 (figure 1). But since the year 2000 U.S. economic freedom has been on the decline. The United States fell from second in 2000 to a low of sixteenth in 2011, thirteenth in 2012, and then sixteenth again in 2013, and its rating (out of ten) fell from 8.65 to 7.73 in 2013. The decline in freedom has been almost across the board.2 Probably most troubling has been the growth of the size of the U.S. government and the perceived decrease in the security of our property rights. Adjusting for inflation, the U.S. government spends 40 percent more today than it did in 2000 (U.S. Bureau of Economic Analysis 2015). As the next section outlines, this increased spending is expected to accelerate to unsustainable levels in the coming years.
To measure security of property rights, the index relies on a number of surveys in the International Country Risk Guide, the Global Competitiveness Report, and the World Bank's Doing Business project in assessing how secure property rights are here (Gwartney, Lawson, and Hall 2014). The U.S. score for this...