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1 Theory 1: We’re running out of innovations. In a new book, economist Robert Gordon argues that this slowdown in new inventions is the root cause of the last decade’s economic malaise. He views the IT-driven boom between 1995 and 2005 as a one-time event that’s unlikely to be repeated. Now, he suggests, people are going to have to get used to slow growth of incomes, worker productivity, and the economy as a whole. Two data points seem to support Gordon’s point of view: the rate of startup formationis at record lows, and so is overall corporate investment.
2 Theory 2: There’s too little spending. Larry Summers, an economist who served as secretary of the Treasury during President Obama’s first two years in office, has championed a theory of "secular stagnation," in which peoples’ desire to save money outstrips opportunities to invest it. This leads to a vicious cycle in which slow spending growth makes companies pessimistic about future growth, causing them to cut investment spending even further.
3. Theory 3: Bad corporate governance is causing companies to under-invest.
4. Theory 4: The economy is weighed down with debt. economist Kenneth Rogoff has argued that the effects of these high debt levels lingered for years after the crisis. Households and businesses realized that they had excessive levels of debt. The result, Rogoff argues, has been a prolonged period of depressed demand as households and businesses focus on paying down their debts instead of buying new goods and services.
5. Theory 5: Excessive regulation is holding back growth. A recent paper by economist James Bessen finds evidence that regulations have created barriers to entry that boost the profits of incumbents in certain industries while reducing the dynamism of the economy as a whole.
Yet it has proven hard to find evidence that this is a major reason for the slow recovery. "I thought that regulation was probably one of the major causes of declining dynamism," says Tabarrok, who co-authored a study on this topic in 2014. But he and his co-author were unable to find evidence to back up the theory. "The basic reason is pretty simple," he says. "You see declining dynamism in pretty much all industries."
6. Theory 6: There’s too much housing regulation in big cities
7. Theory 7: The economy is becoming dominated by big, incumbent companies. Two well-known advocates for the view that industry concentration is holding back economic progress are Phillip Longman and James Schmitz. But I found their arguments hard to evaluate because they seemed highly backward-looking.
Longman, for example, argues that deregulation of the railroad, trucking, and airline industries allowed industry consolidation that has, in turn, hurt smaller cities and towns. That might be true, but it’s hard to believe that it’s a major factor driving recent economic trends. After all, the fastest-growing industries of recent decades — like software and finance — are not very dependent on railroads or trucking to get their goods to market.
8. Theory 8: A slow-growing, aging population is hurting growth. A final theory suggested to me by Tabarrok is demographics. Americans are having fewer babies than they did in the past, and this has had two related effects: The population as a whole is growing more slowly, and the average age of the population is rising.
There’s reason to think that both trends are bad for economic growth. Younger people are more likely to pursue new ideas, take risks, and start new businesses. So an aging population is likely to lead to a less dynamic economy.
Slower population growth can also be a source of economic stagnation in its own right. A rapidly growing population means rising demand for products of all kinds — new homes, restaurants, shopping malls, and so forth. So more businesses will be started in general, which means more opportunities for experimentation. Successful stores, restaurants, and other businesses can be expanded or franchised to other metropolitan areas, allowing good ideas to spread quickly.
In contrast, in a country with a more stagnant population, starting a new business requires replacing an existing business. Even if a young person has an innovative idea for a new company, the practical difficulties of getting the business started might be too great for putting the idea into practice. And so change can only happen by convincing existing business owners to change their behavior — an inherently slower and more difficult process.
