In this business we spend a lot of time thinking about problems. What if we could wave a magic wand and make them all go away? Maybe we can.

The wand isn’t made from wood. You don’t need Latin phrases or a special incantation learned at Hogwarts to make it work, either. It’s a simple six-letter word: growth. Get the economy growing at a decent pace again, and most of our problems will get better.

Conversely, they’ll only get worse if we stay in slow-growth mode. And don’t even think about what a recession will do to the markets in this environment.

Fortunately, there are things we can do to bring growth back. We just have to decide to do them.

The Solution To Every Problem

A new reader browsing through my archives might get the impression I am a worrywart. In fact, I’m quite optimistic about our future – but I don’t deny we face serious challenges. My weekly letters are a peek into my ongoing thought process as I wonder how we will tackle those challenges.

Just in the past few months we’ve looked at problems like retirement, energy prices, political chaos, zero interest rates, negative interest rates, China’s economy, terrorism, unemployment, inflation, pensions, healthcare, refugees, and the Federal Reserve. And an overarching theme of many letters has been the very big problem of growing debt. Whew – so many problems.

We can look at each of these challenges individually and come up with possible solutions. Would our solutions work? I don’t know, but I’m confident we would see improvement on all fronts if we got GDP growth back up to 4% for a few years.

In the summer of 2012, a few weeks after House Speaker Newt Gingrich had withdrawn from the presidential race, he and his wife Callista came to visit me at the villa we were renting in a tiny town on a mountain in Tuscany, Italy. In addition to doing the usual tourist stuff, Newt and I spent more than a few evenings talking late into the night about an extraordinarily wide variety of topics and discovering that we had many interests in common.

I remember one late night in particular, when I challenged him a bit on the tax and budget plans he had outlined in his campaign. While I agreed with their general direction (and still do), I was concerned about the growing US debt and wanted to see a return to paying the debt down. His plan simply balanced the budget and held government budget growth below economic growth. “How do we deal with the debt?” was my question. His answer was simple: “With the budget and regulatory changes I outlined, we simply grow our way out of it.”

That had been his experience when he and Rep. John Kasich (to whom he still gives a great deal of credit) worked with then-President Bill Clinton to balance the budget – and the country actually began to run surpluses. We grew our way out of the problem. If the Republicans under President Bush had not squandered the opportunity Clinton, Gingrich, and Kasich left them with, we would have come to the 2008 recession with very little if any debt and a healthy ability to run deficits without damaging the long-term prospects for growth in this country. And if we had actually used those deficits to build the infrastructure that was talked about but never undertaken? We would have something to show for the massive government debt we’re saddled with now.

So, is growing our way out of debt a pipe dream? It shouldn’t be. The US economy grew about 3.5% a year from 1950 through the year 2000. During that period there were many expansions in which the economy grew even faster than that average, and there were recession years when growth was much lower.

This alternation is exactly what economic theory says we should expect – every economy goes through boom-bust cycles. Since the end of World War II, we have had a recession every 5–10 years or so. Our experience was that they always gave way to an expansion that made up the lost ground and then some.

It hasn’t worked that way this time. We entered a recession in late 2007 that officially ended in September 2009. Now it’s 2016. This month will mark 81Ž2 years of economic expansion. So why is no one cheering?

Because the less than 2% average growth we have seen since the end of the recession (and actually, since the year 2000) has added very little real income to most American households. Many of us have seen our job situations end up dramatically changed, with our new positions offering significantly less income. In addition, instead of the reduced healthcare costs we were promised under Obamacare, most of us have seen our costs go up dramatically.

So the great majority of us aren’t feeling like we have recovered. While some are better off now, the growing divide between those who are flush and those who are scraping by has resulted in a groundswell of voters from both parties demanding change.

There is a fascinating quote attributed to Lord Salisbury, who was the Tory prime minister of England during Queen Victoria’s reign. Supposedly, when she said things must change, he said, “Change? Change? Aren’t things bad enough already?” Sometimes, when you wish for change, you’d better be prepared to get what you ask for. Sometimes you get it good and hard. And speaking of change…

Little Changes Add Up

Last month I ran across a fascinating study by economist John Cochrane. He is a senior fellow at the Hoover Institution, former University of Chicago professor, and adjunct scholar with the Cato Institute. He blogs as The Grumpy Economist but doesn’t seem all that grumpy, as economists go.

Cochrane wrote a paper on economic growth last year as part of a project to design presidential debate questions. Sadly, the candidates chose to talk about other issues such as finger length and personal energy levels, but Cochrane’s paper is still useful. I’ll discuss  it briefly, but everyone should read the full version. It is not at all technical, and you will learn much.

He begins by showing how small changes matter a great deal in the long run. The economy grew by over 31Ž2% from 1950 to 2000. From 2000 the economy has grown at about half that rate, or 1.7%. And therein lies the reason that incomes have been so punk for much of America:

Small percentages hide a large reality. The average American is more than three times better off than his or her counterpart in 1950. Real GDP per person has risen from $16,000 in 1952 to over $50,000 today, both measured in 2009 dollars. Many pundits seem to remember the 1950s fondly, but $16,000 per person is a lot less than $50,000!

If the US economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000 not $50,000! [emphasis mine] That’s a huge difference. Nowhere in economic policy are we even talking about events that will double, or halve, the average American’s living standards in the next generation.

I don’t know about you, but to me those are stunning numbers, for several different reasons. I was born in 1949, so GDP per person has more than tripled in my lifetime. That’s in constant dollars, so it isn’t just “growth” by inflation.

Yet this tripling would not have occurred if the economy had grown at 2% a year instead of 3.5% during my lifetime. That extra 1.5% made an enormous difference. In fact, the difference is even greater.

GDP per capita does not capture the increase in lifespan – nearly 10 years – in health, in environmental quality, security and quality of life that we have experienced. The average American today lives far better than a 1950s American would if he or she had three rather than one 1950s cars, TVs, telephones, encyclopedias (in place of internet), or three annual visits to a 1950s doctor…”

Those 1950s doctor’s visits now seem like Stone Age medicine. And that doesn’t take into account mobile phones, Google maps, and a plethora of other things that make our life better because the growth of the economy made us better able to afford them.

But even these less quantified benefits flow from economic growth. Only wealthy countries can afford environmental protection and advanced health care. We can afford to worry about global warming. India worries about 600 people per toilet, emphysema from burning cow patties, and easily treatable parasitic infections. Our ability to defend freedom around the world – even if we are wise enough to do it sensibly – depends on robust economic growth. If GDP had grown at 2%, not 3.5%, we would only be able to afford half the military we have today. The immense improvements in the quality of goods and many services we have today are part of the engine of economic growth.

This is why the recent years of subpar growth are a big problem. It isn’t just the current feeble recovery: we are now almost a full generation into a low-growth era that marks a departure from most people’s prior experience. It’s no wonder so many folks are discouraged and angry. (And by the way, we’re growing faster in the US than they are in Europe and Japan.)

Some economists will argue that the last century was an aberration. Robert Gordon is a good example. Watch his TED Talk if you’ve never seen it. He believes a handful of one-time breakthroughs (electricity, automobiles) accounted for most of the economic growth we now think should be normal. I disagree with Gordon – and will attempt to rebut him in my upcoming book – but I have to admit he makes some very good, valid points.

(The short version of my view is that I think we’re on the cusp of changes that will be just as revolutionary as electricity and that will boost our growth considerably – even by the standard measure of GDP, which we know misses so much. This is why I am optimistic about our future.)

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