Introduction:

In the aftermath of the recent financial crisis and Great Recession, much attention has been focused on financial imbalances in the U.S. economy and the need for financial sector reform. There is, without doubt, good reason for this. But it is important not to overlook the fact that, prior to 2007, the U.S. was bedevilled by important real sector imbalances. These real imbalances, which were important contributory factors to the financial crisis and Great Recession, and which continue to threaten the macroeconomic performance of the U.S. economy going forward, are the focus of this chapter.

The central arguments are as follows: Balanced growth of aggregate demand and aggregate supply requires (as a first approximation) that real wage growth keeps pace with productivity growth. But this has not happened in the U.S. since the early 1970s. The result is a structural flaw in the aggregate demand generating process in the U.S. economy, creating a latent aggregate demand deficiency. The aggregate demand deficiency was latent for several decades following its initial emergence because of the existence of numerous temporary and unsustainable "offsets" – most notably, household debt accumulation. Since 2007, however, the aggregate demand deficiency has become dramatically manifest, thanks in large part to the exhaustion of the household debt accumulation 'engine' of U.S. consumption growth. These developments now threaten a future of secular stagnation which, in turn, constitutes a formidable policy challenge for the U.S. economy. The remainder of the chapter is organised as follows: Section 2 outlines the importance of the relationship between real wage and productivity growth for balanced growth in the goods market using growth accounting and simple Keynesian consumption theory. Section 3 discusses recent (post 1970s) U.S. experience in light of this exercise, while Section 4 outlines the prognosis for the U.S. economy. Section 5 offers some conclusions that focus on the policy challenges currently confronting the U.S. economy.