The core driver of US prosperity has disappeared and no one has noticed. Growth has been the central driver of the American economy ever since early settlers built up the East Coast and moved into the Appalachians; by the middle of the nineteenth century, the California Gold Rush and the Transcontinental Railroad had finished the growth from coast to coast. But it was much more than geographic growth. The United States had become the world's leading economy, a position it consolidated in the twentieth century as two World Wars devastated Europe.
Throughout this entire period, immigration helped to fuel expansion as new immigrants formed an economic underclass of unskilled laborers, acquired the skills to move into the middle class, and were replaced by still newer immigrants as growth continued. Immigration became increasingly important for economic expansion in the United States (and also in much of Europe) as the native birthrate fell below the 2.1% necessary for population replacement.
Growth continued into the twenty-first century, though the effects of economic globalization became increasingly evident: US companies systematically moved manufacturing operations overseas, while an emerging global market for intellectual work gradually drained many good-paying US jobs. Then the bursting of the US housing bubble in 2008 brought first US and then global economic expansion to a screeching halt.
The housing bubble was caused by an artificial rise in house prices. There was a parallel pressure on companies to expand, to grow their stock prices. New companies were established and their values inflated as quickly as possible so that an Initial Public Offering would provide the founders a financial windfall without any real economic benefit.
For years, the cornerstone of many investment portfolios had been blue chip utility stocks, prized for their ability to provide steady income, year in and year out. Turmoil in the utility markets and volatility in the overall markets replaced a reliance on steady income with a search for rapid capital gains. So it was not only an overpriced housing market that collapsed but also an overpriced stock market. The Dow Jones fell almost 50% from May 2008 to March 2009.
Economic stimulus actions have generally stabilized the economy; growth is expected to be well over 2% in 2010, but one key indicator remains worryingly resistant to improvement: the jobless rate. At the current growth rate, employment may not recover for a decade. One underlying problem is that there is now a global competition for higher-paying jobs, so many of the jobs US workers lost will not come back. More fundamentally, the US economy was a consumption economy and this was an underpinning of the entire global economy. High unemployment and a new sense of economic wariness have significantly limited consumption, complicating the resurgence of not only the US economy but also the global economy.
US economic growth has depended on the continuing growth of the service sector. Immigrants supplied the manpower necessary for this continuing growth, but now much of the growth of the service sector has moved overseas. There are still many menial and unskilled jobs, but jobless skilled workers are very reluctant to take them - for good reason. They do not provide a real living wage. Immigrants still take them, even though they are becoming more difficult to find. More importantly, they are no longer a stepping stone to a middle class life. Instead, unskilled immigrants face being part of a permanent underclass. They are no longer needed as a source of new semi-skilled and service workers because such workers are already in excess.
The artificial concentration of good paying jobs in the industrialized world in general and the United States in particular is gone. The global leveling of the job field is also resulting in the global leveling of the population field: higher birth rates provide more mouths to feed without providing the employment opportunities to support them. Now it is clear that lower birth rates are a prerequisite for increasing national wealth. Global population dynamics have shifted dramatically. Almost half the world is now below the replacement fertility rate - this applies to some 70 countries, including most of the industrialized world. By 2020, the global fertility rate will be below the replacement level; world population will level off by mid-century.
Now the nation works hard to re-gain the economic growth seen as essential to prosperity. The entire world looks for renewed US expansion to fuel renewed US consumption and thus renewed global expansion. But this is not going to happen. The key question is not how to maintain growth when the population stagnates, but rather how to maintain prosperity with a stable population. The challenge is not how to re-ignite growth, but of how to maintain a high standard of living without it, how to create a more efficient society that, like the blue chip stocks of old, can continue on indefinitely with modest but steady profit.
A steady economy can still be a dynamic one, as companies put more emphasis on efficient and profitable operations rather then on steady growth. Of course, some companies will inevitably grow and others decline. Economies of scale will drive some size increase, though rising transportation costs (both for fuels and driver wages) will counter this to some extent. But the economy as a whole needs to stabilize, to accept that growth will no longer be the core driver of prosperity.
Growth is gone. Prosperity will now depend on constructing a viable steady state state.