Economic Insights - November 2014

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Thanks largely to counter-productive policies, the United States has been very slow to make the kinds of institutional transitions needed to return to robust growth. For a more complete explanation of this economic transition, Business Briefings subscribers should read Ride the Wave by Fred Rogers and Richard Lalich.

To put it concisely, we'll only be able to reap the full economic benefits of the coming wave of digitally enabled technologies once we've revamped our major institutions. Those institutions range from capital markets to labor, education, and regulation.

The disappointingly slow growth we've seen over the past 15 years, and especially the past six years, has resulted from policies aimed at shoring up the status quo institutions designed for the Mass Production Era, rather than transforming those institutions to complement the realities of the Digital Age.

Motivated largely by a laser-like focus on national security, the Bush Administration, and a spend-friendly Congress, pushed temporary "stimulus" spending in 2001 and then followed Larry Summers' Keynesian advice in early 2008 and passed tax credits and even more stimulus. Even the Business Briefings team supported TARP because it was the only solution on the table for halting the global investor panic that threatened the core financial system.

However, it was clear to us that the last thing that was needed was the "stimulus" approved in 2009. And while quantitative easing was a bad stand-alone concept, it was necessary to compensate for the huge drag created by misguided fiscal policy.

This is the reason real GDP growth during the current recovery is the slowest five-year period of growth without a recession in the past 100 years.

Fortunately, a "digital-ready economy" exists in many sectors, like fracking and high-tech; like 3-D printing, the cloud, smartphones, and apps. This portion of the economy is thriving despite government policies and is driven by free markets.

So what are the implications for the economy in the short term? The current recovery started in mid-2009. Since then, real GDP has grown at a 2.2 percent annual rate. Now, despite a negative first quarter caused by weather and inventories, the economy is picking up...

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