President-elect Trump is right: the economic recovery post-Crisis has been tepid. An academic paper I found in the process of writing our recently-published report to IOI members analyzing the investing implications of the incoming administration suggests that the amount of underperformance is about 12%. In other words, the economy would be more than a tenth larger if it were growing according to the historical trend.

This underperformance is very visible in one of the charts in the full report:


We believe that the notable underperformance since the Great Recession (marked by “Region D” in the figure above) relates to a period of deleveraging among American households.

However, the academic paper, written by a PhD candidate at New York University, Callum Jones, finds that an even larger effect is due to simple demographics. According to Jones’s model, roughly 50% of the output gap can be attributed to retiring Baby Boomers’ saving, spending, and working habits, and only roughly 20% to “real” effects, such as deleveraging.

The paper is wonkish (what academic paper is not), but it does raise an interesting point. Namely, that slowing GDP is a structural, rather than policy issue. While we think deleveraging has a greater impact (see the full IOI report for the reasons why), we realize that demographic effects are extremely powerful, so are likely adding to the malaise.

You can read a copy of Mr. Jones’s on his site, or we have embedded the most recent edition here:

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