Closing America’s Growth Deficit

MILAN – As the American economy continues to sputter three years after the global financial crisis erupted, one thing has become clear: the United States cannot generate higher rates of growth in GDP and employment without a change in the mix of the economy’s domestic and export-oriented components. Above all, this will require structural change and greater competitiveness in an expanded tradable sector.

For more than a decade prior to the crisis that began in 2008, the US economy fueled itself (and much of the global economy) with excessive consumption. Savings in the household sector declined and leveled off at about zero, as low interest rates led to over-leveraging, an asset bubble, and an illusory increase in wealth.

Government, too, dissaved by running deficits. Overall, the US economy expended more than it generated in income, running a trade (more precisely a current-account) deficit, and borrowed the difference from abroad. Both household and government spending patterns in relation to income were unsustainable.

With more than ample domestic demand, considerably boosted by rapid expansion in government and health care, the US economy sustained growth and employment in the face of large increases in the labor force (27 million new workers since 1990), notwithstanding the substantial headwinds created by new labor-saving information technology. Setting aside financial sustainability, the most worrying aspect of the pattern was distributional: very low wage growth in the middle-income range.