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Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways
To Change The Tide

Secular Stagnation

The Fed's expectation for long-run U.S. economic growth has drifted down even more than our forecasts. Five years
ago, the Fed expected to see the economy ambling along at a respectable 2.65% annual pace over the long run. By
June, the Fed's expectation for long-run growth in the U.S. had dropped to 2.2% (central tendency was 2.1% to 2.3%).

The IMF and CBO have also lowered their long-term growth projections. Last month, the IMF lowered its long-run
growth forecast for the U.S. to about 2% (47). The CBO now projects that real (inflation-adjusted) GDP will increase at
an average annual rate of 2.3% over the next 25 years, compared with 3.1% during 1970-2007.

Aside from the fact that there are different Federal Open Market Committee participants now than before, the Fed's
reasons for lowering its expectations for long-term growth are likely similar to concerns that the IMF and CBO raised,
including the effects of an aging population on the economy and more modest prospects for productivity growth. The
CBO also noted that in addition to the retirement of the baby-boom generation, the declining birth rates and leveling
off of increases in women's participation in the work force also helped slow the growth of the labor force.

In this light, former Secretary of the Treasury Lawrence Summers has said that the U.S. may be mired in a period of
slow growth, marked by only marginal increases in the size of the workforce and small gains in productivity--what he
called "secular stagnation" (48). This refers to an economic era of persistently insufficient economic demand relative to
the aggregate saving of households and corporations. Here, the U.S. may be stuck in a long-run equilibrium where real
interest rates need to be negative to generate adequate demand. Without that, the U.S. slides into economic
stagnation. While specific causes of secular stagnation are still uncertain, possible reasons include slower population
growth, an aging population, globalization, and technological changes. An increasingly unequal distribution of income
and wealth is also cited as a contributing factor. Disparate income growth is important because those at the top of the
distribution have a higher savings rate. Since income that is put into savings is not spent, it undercuts the overall level
of economic activity that takes place. Mian and Sufi emphasize the role of income inequality and how recent years
seem to suggest the only way the economy is capable of generating faster economic growth is by being juiced with
more aggressive credit expansion, which does not last (49).

Unfortunately, the move toward low-paying jobs has continued unabated. In the past four years since the outset of the
U.S. economic recovery, job gains have come mainly in low-paying positions, according to the National Employment
Law Project, an advocacy group for low-income workers. While 22% of job losses during the recession were in
lower-wage industries, 44% of employment growth in the past four years has come in this group--meaning that, today,
lower-wage industries employ 1.85 million more Americans than before the downturn. And often these low-wage jobs
have less access to benefits, such as private health insurance, pensions, and paid leave, compared with their
higher-paying brethren (50). Considering the Bureau of Labor Statistics' forecasts that low-paying jobs will dominate
employment gains for the next decade, it seems clear that labor-income disparity will continue to widen.

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