John Kenneth Galbraith, one of the most famous practitioners of the high-minded guessing game known as economics, once noted that in the dismal science, “the majority is always wrong.” How else to explain the fact that so many economists upgraded their growth forecasts for the American economy at the end of last year, often to well above 3%, when the numbers so far this year have come in below 2%? The plunge is due to many things, from higher food and oil prices to supply-chain disruptions in the wake of the Japanese nuclear disaster to a terrible housing market. But the bottom line is that the 2% economy is reshuffling the deck on everything from the debt debate to job growth to the likely outcome of the 2012 elections. Here in the U.S., there won’t be many winners.
To understand why, a little math is in order. When the economy grows faster, tax receipts go up too. That can make a big difference in the debt picture. For example, if the economy grew steadily at, say, 3.9% — which the Fed, in its own moment of irrational exuberance back in February, predicted it might for the year — our national debt would decline over the next decade from roughly 100% of GDP to a relatively svelte 83%. No more excruciating conversations about cutting Grandma’s health benefits or squeezing another five kids into already overcrowded classrooms. If, on the other hand, we grow at 1.8% over the next 10 years, debt rises to 144% of GDP. That makes us Greece. Except that we don’t have Germany to bail us out. And we have 13.7 million unemployed people. But with debt levels that high, the government would find it impossible to throw any more money at the employment problem. Even now, budgets for things like job retraining and government-sponsored work programs are being whittled back. Add to that mix depressed consumer spending, which in May dropped to a six-month low. That means companies will likely continue to sit on their $1 trillion pile of cash rather than using it to hire more workers. The result is more of what we’ve already seen — namely, an anemic, jobless recovery. The McKinsey Global Institute predicts that it will take five years to bring employment back to its prerecession peak. In the 2% economy, you can add an additional year or two to that estimate, easy.
Of course, there are still economists who say growth will pick up toward the end of the year. Whatever happens, there’s no changing the bigger trend line. The U.S. and the world are in the middle of an economic rebalancing that hasn’t been seen since the rise of the great European empires in the 1500s. Power is shifting from West to East, technology is rejiggering the relationship between growth and jobs, and both trends are intersecting in ways that have undercut the upward trajectory of our economy. It’s uncharted territory, in which policymakers and economists alike are flying blind. Dismal science, indeed. This article originally appeared in the June 13, 2011 issue of TIME.
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