The Real Challenges to Growth

MILAN – Advanced economies’ experience since the 2008 financial crisis has spurred a rapidly evolving discussion of growth, employment, and income inequality. That should come as no surprise: For those who expected a relatively rapid post-crisis recovery, the more things stay the same, the more they change.

Soon after the near-collapse of the financial system, the consensus view in favor of a reasonably normal cyclical recovery faded as the extent of balance-sheet damage – and the effect of deleveraging on domestic demand – became evident. But, even with deleveraging now well under way, the positive effect on growth and employment has been disappointing. In the United States, GDP growth remains well below what, until recently, had been viewed as its potential rate, and growth in Europe is negligible.

Employment remains low and is lagging GDP growth, a pattern that began at least three recessions ago and that has become more pronounced with each recovery. In most advanced economies, the tradable sector has generated very limited job growth – a problem that, until 2008, domestic demand “solved” by employing lots of people in the non-tradable sector (government, health care, construction, and retail).

Meanwhile, the adverse trends in income distribution both preceded the crisis and have survived it. In the US, the gap between the mean (per capita) income and the median income has grown to more than $20,000. The income gains from GDP growth have been mostly concentrated in the upper quartile of the distribution. Prior to the crisis, the wealth effect produced by high asset prices mitigated downward pressure on consumption, just as low interest rates and quantitative easing since 2008 have produced substantial gains in asset prices that, given weak economic performance, probably will not last.