An Economy Stuck in Second Gear

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

At the risk of being too folksy by half, think of the economy as a car with a standard transmission where each gear corresponds to economic growth â€" first gear is 1 percent growth; second gear is 2 percent; recession is reverse, etc. (It’s an easy analogy for me because I still drive a stick â€" the rest of you just play along.)

According to recent reports on gross domestic product, growth over the first half of the year averaged 1.4 percent.  Similarly, employment growth, including Friday morning’s payroll report of a net gain of 162,000 in July, has been cruising along at a remarkably steady annual rate of 1.5 percent to 1.7 percent for over a year (since April 2012).

So what’s wrong with that?

The problem is that we’re stuck in low gears.  Sure, first and second are better than reverse, and both the G.D.P. and job results confirm that the risk of going backward is low.  We’re reliably growing, but too slowly to absorb the residual slack in the economy left over from the Great Recession, even four years into an expansion that officially began in the second half of 2009.

Basically, the economics of our situation is that we’ve settled into something slightly below trend growth â€" with “trend” being the pace of growth that would be acceptable if we had repaired the residual damage. The growth rates presented above may nudge the unemployment rate down a bit, as occurred last month â€" the jobless rate fell from 7.6 percent to 7.4 percent (though a bit of that was due to people leaving the job market) â€" but unless we accelerate into higher gears it will be years before we get back to full employment.

As The New York Times reported on Friday morning: “At the average rate of job growth seen so far this year, it would take more than seven years to close the so-called jobs gap left by the recession, according to the Hamilton Project at the Brookings Institution.”

There’s nothing wrong with trend growth, unless you settle into to it too soon.  After a deep recession, there first needs to be a number of quarters of “bounce back,” as demand that was pent up during the downturn helps to quickly close output gaps.  But that’s not something we’ve seen in the United States economy in recent decades.  Our recoveries have been much too jobless and wageless for their first few years.

As any good standard transmission driver will tell you, second gear is something you pass through as you accelerate to higher gears and a faster trip to wherever it is you’re going.  There are a lot of working families out there who’d very much like to join that ride.