According to The Economist, “In the three years since the end of the recession in mid-2009, growth averaged 2.2 percent, barely half the 4.2 percent average of the seven previous recoveries.” This begs the question: How fast should the economy be growing?
Economists, academics, and policy makers have been trying to figure that out. Many have started with an economic theory put forward by noted economist Milton Friedman in 1964. His “Plucking Model” postulates the business cycle is like a string attached to a board. The board represents “the ceiling of maximum feasible output.” Once in a while, the string is plucked down by recession and then it springs back. The idea is the depth of a recession will be mirrored by the strength of the recovery that follows.
At first blush, the Plucking Model doesn’t appear to apply to this recovery. The Great Recession was the deepest downturn since World War II, and the country hasn’t snapped back. According to several recent reports, there may be a reason for this. The ‘ceiling of optimal output’ – the fastest rate at which the economy is expected to grow – may be lower than it used to be.
Considered together, the reports seem to indicate U.S. economic growth (and that of the U.K) began slowing before the recession and, unless demographic trends shift, the U.S. and our own country, may continue to experience slower growth.