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What’s Killing Economic Growth?
On Friday, the Commerce Department reported that the US economy grew at a deeply disappointing inflation-adjusted rate of 1 percent in the first half of 2016. Over the weekend, The New York Times ran a deeply gloomy piece titled We’re in a Low-Growth World. How Did We Get Here?
One central fact about the global economy lurks just beneath the year’s remarkable headlines: Economic growth in advanced nations has been weaker for longer than it has been in the lifetime of most people on earth. …
This slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2 percent a year from 1947 through 2000 — but starting in 2001 has averaged only 0.9 percent. The economies of Western Europe and Japan have done worse than that.
Over long periods, that shift implies a radically slower improvement in living standards. In the year 2000, per-person G.D.P. — which generally tracks with the average American’s income — was about $45,000. But if growth in the second half of the 20th century had been as weak as it has been since then, that number would have been only about $20,000.
How are India and China going? Perhaps what’s happened is that there are better places to invest? Iow competition.
The united states is the engine of the world. When we suffer, everyone suffers. And we have had terrible government policies that rob us of freedom and deter economic vigor.
Theory 1 and 7 are results of Theory 4 and 5.
Theory 3 may be an issue, but if we had a macro economic landscape hospitable to capital deployment and entrepreneurial creation the market place would self correct (a foreign concept in these pages).
Theory 2 is the progressive Keynes canard and should be dismissed.
Theory 8 merits consideration, but Zafar alphas already begun to refute it.
Sort of all of the above except 1 and 2. And all are consistent with Mancur Olsen, “The rise and Decline of Nations”. After long periods of peace and prosperity distributive coalitions accumulate and extract rents. Being also part of emergent systems, it’s impossible to track all the pieces of leverage, toll gates that work against prosperity and flourishing. Olsen made a very good case, and we’re seeing evidence of his analysis. Who is getting more wealthy? Who isn’t? His hypothesis conforms to reality.
Anyone notice what is missing from the list? Like government intervention in the marketplace?
Europe has been stagnant for years. They have tremendous government intervention. So does Japan.
Now government intervention can cause tremendous growth short term. That is what happened in Japan. (Of course, their economy started from a very low baseline in 1945, so getting high growth rates as a percent of GDP isn’t that difficult.)
The real key is the US economy. Much of the growth of the European and Japanese economies came from borrowing US innovations. Cell phones grew outside the US because there was no perceived need for them in a country with extensive land line connections. But much of the seed technology came from the US.
The US had a mature economy which was constantly growing at a steady pace until 2006 – when a Democrat Congress was elected and turned the government regulation knob to 11. We’ve been bouncing along the bottom since then, dragging the rest of the world with us.
Seawriter
When I read Claire’s piece I thought #4 and #5 represented government intervention. Did I miss something?
Excessive government regulation, combined with an anti-capitalist setting the regulatory environment.
The rules for how to navigate the future are unknown and subject to change at the whim of the would-be emperor.
Of course the economy will stagnate under these conditions.
Let Hillary gain the WH and this is certain to continue. Enforced Socialism in a free Republic is doomed to failure, and particularly for the endangered Middle Class.
Socialists want to make the Middle Class the dependent class.
By the way the graph is consistent with Olsen’s hypothesis. The countries that lost the war were picked clean of pre war distributive coalitions, those that won were already in fairly advance stages of the disease.
#5 was local. #4 is too focused. Government intervention is the government subsidizing companies, not over-regulation. Crony capitalism strangles innovation in its cradle.
Seawriter
Milton Friedman on economic growth …
… the great achievements of civilization have not come from government bureaus …. Einstein didn’t construct his theory under order from a bureaucrat; Henry Ford didn’t revolutionize the automobile industry that way. The only cases in which the masses have escaped from the kind of grinding poverty that you’re talking about, the only cases in recorded history … are where they have had capitalism and largely free trade … so the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.
Let me expand on my comment #9. Remember Japan Incorporated? Two reasons Japan grew so explosively in the 1960s and 1970s were Honda and SONY. Both succeeded in spite of the Ministry of International Trade and Industry (MITI). MITI did not want Honda making cars for export and wanted them to focus on motorcycles. MITI attempted to keep SONY out of transistors.
Similarly, in the US the PC revolution took place because the government thought it was unimportant and could not be bothered to subsidize it. Entrepreneurs like Jobs and Gates succeeded in outperforming IBM and Digital. Today they would find it more difficult because the government dumps money to favored corporations. (Microsoft did not even have any lobbyists until the 1990s.) This keeps those corporations in the game and squeezes out the innovators.
Result: lower innovation and many innovators start with the idea of coming up with a brilliant idea in order to sell out to a crony company. The idea does not get fully realized.
Seawriter
We have the most anti-business administration since FDR’s in the 1930s. Here are nine things our government can do to turn things around:
There’s a hint in this, from the cited article: the usual menu of policies, like interest rate cuts and modest fiscal stimulus, aren’t up to the task of fixing it (though some well-devised policies could help).
This “usual menu of policies” never has worked. Artificially suppressed interest rate cuts hurt private income: we still have a significant fraction of our population desirous of, if not outright dependent on, fixed income instruments; we still have the stereotypical widows and orphans–even more so, with an aging population. Artificially low interest rates hurt private income, which hurts demand, badly, since it hurts even the ability to obtain life’s necessities. Lowered interest rates from ordinary economic cycles also do this, but in this case it’s relatively easy to predict when the cycle will turn and interest rates recover–and they generally do within the ability of a private family to survive a mere downturn. When Government does it, there’s no way to predict a change: see the current years-long Fed blather about how they’re going to raise rates real soon now. As if they should be in that business at all, beyond their mandate to manage price levels.
Fiscal stimulus–the bastardized Keynesian stimulus, which the Left knows full well doesn’t work, but it’s good for their street corner dependency pushing and vote pandering–can’t work. It’s questionable whether stimulus as Keynes actually proposed it could work, but there’s no evidence for that. What the Left masquerades as Keynesian stimulus is simply permanent and growing debt which is either future much higher taxation or much higher inflation (which is price rise, independently of anything the Fed does with interest rates, and which is another form of taxation). This is money withdrawn from the private economy, which is reduced demand, also regardless of anything Government might do. Too, all that Government spending crowds out private spending through competition for the same goods and services and from generating a mindset that Government will take care of it; no need for me to.
We also saw the effect of “infrastructure” projects, and Obama’s yukking it up about how “shovel ready” wasn’t really so shovel ready. We saw, too, how “infrastructure” projects were, in the end, just money transfers from private citizens and our spending, projects, and charities to government-favored cronies and projects.
Government regulation takes nearly a trillion dollars out of the economy annually in the form of compliance costs and costs to show proof of compliance. And lost opportunities either because regulations make a private investment not cost effective or because regulation prohibits the project at the outset.
We’re already well past the optimal level of taxation, which were we to adhere to the Constitutionally mandated purposes still would be a potful of money, but not nearly as much as Government takes currently. We’re also seeing the effects of Government misusing our current tax regime to conduct social engineering (leaving aside the fact that this engineering isn’t even done IAW the citizenry’s desires or needs, but solely IAW what Government denizens say those desires or needs should be). Such market distortions only introduce obstructions to both demand and supply by moving the prices of those in Government-desired (and too often unexpected) directions rather than market determined directions. We see the effect of this in the housing bubble of a few years ago, the growing housing bubble today, the dot com bust of a few more years ago, farm price floors still extant from the FDR years, wage floors (and rising floors) still extant from those same years, the interaction between wage and price controls generating a perceived need for food stamps and welfare generally, and on and on.
In the end, no private individual has much of an idea of where the economy is going, or where to invest (or save) his money, any more than any Government politician or bureaucrat. But private individuals seeing to their individual needs and wants, in their aggregate, do a very good job of taking care of the larger whole as well as of themselves. Government, as it grows, though, both loses (if it ever had) trust in that collective wisdom and gains increasing imperative to see to Government ends and not the citizens’. Government, after all, is men, and men in power seek to perpetuate and grow that power–for their own individual wants and needs.
There’s a lot more, but this much is sufficient for illustration. And it illustrates the solution, which is at once simple in execution and difficult in implementation: roll back regulation, roll back taxes, roll back spending to within tax income, roll back the number of government employees. Teach/elect politicians to understand that doing nothing is as productive as doing something and far more productive than doing anything just because it seems like a good idea or just because they think it necessary to look busy.
Eric Hines
They are – Along with the rest of Southeast Asia – blowing everyone else’s doors off (to the extent that one trusts the data they release)
Could it be that the West and Japan have exported our growth in exchange for cheap stuff?
They’re also growing from an extremely low base.
Eric Hines
They should at least have been included on that graph. I suppose somebody would say they aren’t “advanced” enough.
I can understand why you’d exclude 2, but why not 1?
I started to look at the article, but the pictures and layout caused my short-attention-span-disorder to kick in. So I don’t know why eight, or who decided that those were the eight. But I’ve noticed a variation on number 5 appearing in the Wall Street Journal: We have too much state and local regulation, and not enough federal regulation to stamp out state and local differences so that under uniform regulations a very few of the biggest and mightiest corporations can take over the entire market and bring back growth. They don’t say it quite that way, but that’s the message.
Here are two examples:
What’s Killing Jobs and Stalling the Economy: A toxic regulatory brew, from Dodd-Frank to state licensing laws, has poisoned the formation of new firms that drive growth.
Telemedicine Runs Into Crony Doctoring: State medical-licensing barriers protect local MDs and deny patients access to remote-care physicians.
Despite its absence front that list, and despite what “Reform Conservatives” will tell you, all that is needed for strong economic growth to return is a supply-side tax cut. Same as it ever was.
Claire,
I have a set of my own factors.
1.) Hyper-regulatory/tax environment. The power to tax is the power to destroy but so is the power to regulate.
2.) Paranoid Environmentalism. When you waste massive amounts of capital and talent because you are terrified of a problem that doesn’t exist, it has a tendency to slow the economy down.
3.) Hyper-sensitive social justice obsession. When you are willing to destroy both the rational merit system and the rational core of knowledge itself in a vain attempt to equalize results for supposedly oppressed people, you will destroy the supply of new talent that enterprise and innovation thrive on.
4.) When you fundamentally undermine the human family, that which is the sustainer, the moral purpose, and the joy of mankind why would you expect normal growth? Their most sacred reason for hope is stolen from the people. Hopelessness and growth don’t go together.
Regards,
Jim
It’s clearly Theory 8 imo. The others have always been true, in varying degrees.
In my opinion, the biggest problem is artificially low interest rates. Most people understand that artificial price controls do not work for any given good in the economy as it screws up the supply and demand for said good. But what is an interest rate but a price that reflects what people are willing to lend money to others for a given period of time? In this way the interest rate is like the master price for the entire economy. Artificially low interest rates send the false signal that there is tons of money out there. Individuals, governments etc are overflowing with money and are willing to lend it. However, this is not true, it’s a government fiction and it’s thrown supply and demand out of whack for the entire economy. The only solution is to bite the bullet and return interest rates to a market price. No one wants to do that though as in the short run there will be a brutal recession of 1 to 2 years as governments and individuals are forced to deal with the debt they’ve taken on. Everyone has been drinking the alcohol of artificially low interest rates and the only solution is to stop and take the consequences of the resulting debt hangover. Sooner or later this has to happen.
When you’re fixing something… a car, a computer, whatever… you always ask “What’s the last thing you did to it? What’s the last major change?”.
It therefore seems downright stupid to me not to notice that THE big change in the world economy in this period has been globalization, and a resulting race to the bottom in wages and loss of jobs in first world countries. And all of these attempts at explanations seem to be ignoring that massive elephant in the room.
Put me down with others on the continued reliance on low interest rates. George Gilder in his latest book makes the case that the Fed is the cause of both low growth and income inequality. Low interest rates encourages investment in finance instead of investment in innovation.
Vox’s #8 runs a close second. I have never understood why people don’t understand that when you’re population is growing at 1/2 the rate it used to that your GDP will be 1/2 of what it used to be.
The chart says it’s a per capita growth in GDP.
Globalization has been steadily increasing since after WWII. The big change has been the explosion of federal regulation under Bush I, Clinton, Bush II, and Obama. Regulation has been a huge hit on a number of levels:
#5:
That’s about 25% of the 2012 US economy.
The accumulated gains are be moved about the network. The effort is presently in the moving and not the accumulating.
A lot of growth came from eliminating inefficiencies. (Internet, Wal-Mart) One can only get so efficient.
The global network that aids growth also hinders recovery. That is, I need to grow for you to grow but you need to grow for me to grow. Eventually someone will move first and that will unclog the system. (I suspect the first mover will move by happy accident rather than by plan.)
Globalization was increasing long before WWII. The Creek Indians of, say, 1720-1820, were beneficiaries of globalization, and then victims. (Lots of their deer hides and trade goods were going across the Atlantic. Quantitative studies have been published, but I’d have to get out of my chair to look them up.)
We haven’t run out of innovations, we quash them with our regulatory regime, educational system etc. Maybe I’m on a double negative. Man may stop innovating, but there will never be an end to them. But my real point is that I’m backing away from specific diagnoses and addressing the disease that is behind all of it. In this context government spending is an important cause for the disease reaching its advanced stages so rapidly. Krugman and his extreme Keynesianism is an anachronism, an M.D. applying leaches to a weakened patient.