From Scott Grannis at Calafia Beach Pundit, The Problem is The Lack of Productivity
That it has not grown faster despite extremely low interest rates and very accommodative Fed policy is not evidence of the failure of monetary policy or the need for yet more Quantitative Easing. No, the failure to grow faster is rooted in weak productivity, which in turn is the result of weak investment, a general aversion to risk-taking, and a general unwillingness to work. Those problems are not the sort that respond to the Fed’s ministrations, nor can they be fixed by more money; instead, they respond to changes in the after-tax incentives to work, invest and embrace risk.
For the past 5 years, productivity has increased by a miserably slow 0.54% per year on average. In the past 70 years, productivity growth was weaker only in the 1976-82 period—a period notorious for its high and rising inflation and a general malaise among the population.
One enduring problem of the current business cycle expansion is the very slow growth of the civilian labor force. Lots of people—about 10 million—have simply “dropped out” and are no longer looking to work, for a variety of reasons. Hint: transfer payments now make up almost 20% of disposable personal income, up 20% from 2007 levels and up 300% from the 5% that prevailed in 1951.
This is a sluggish recovery desperately in need of better incentives to work, invest, and take risk. Cutting marginal tax rates would help tremendously, as would a reduction in regulatory burdens.
Population growth is normally conducive to increases in productivity , but not when transfer payments are substituted for work and not when the marginal tax rate for those receiving these payments are effectively 100% (the costs of lost benefits when you earn X)
I add one factor almost all such analysis omit. The frequency of change in the tax code and regulations (friction costs) is so high that minor changes or improvement will not be trusted to last long enough to have any impact. Because of this lack of trust, the incentive/ change would have to be more significant.
The longer these transfer payments and friction costs last the more socially disruptive and politically unpalatable they become. Policy is much easier to change than culture.