Tag: Economic Growth

Eli Dourado, a senior research fellow at Utah State University, joins Brian Anderson to debunk myths about the great stagnation, discuss new technologies that are on the precipice of unleashing growth, and detail the regulatory strictures and complacency that stand in their way.

Find the transcript of this conversation and more at City Journal.

How the US Economy Can Counter Its Demographic Headwind

 

The excellent 2016 book The Rise and Fall of American Growth by Northwestern University economist Robert Gordon — a book I frequently write about — is often portrayed as a work of technological pessimism. But Gordon doesn’t see it that way. Tech progress and innovation, as eventually reflected in productivity growth, isn’t going to slow in his view. It will pretty much continue as it has for decades — just no acceleration to the boomy 1920-1970 productivity pace due to advances in AI or robots or medical miracles. The demise of rapid economic growth is due to various “headwinds,” he argues, not technology. Not only will those factors slow per capita GDP growth, but much of that growth will be captured by wealthier households. Indeed, inequality is one of Gordon’s headwinds.

Another growth constraint, according to the economist, is demographics. This is uncontroversial. All those baby boomers are heading into retirement, and Americans are having fewer kids. Labor-force growth used to be so rapid — especially with women entering the job market as never before —  that overall economic growth stayed fast even as productivity growth weakened. A San Francisco Fed analysis in 2018 noted the following:

In the 1970s, labor force growth alone contributed 2.7 percentage points to GDP growth, meaning that even if productivity growth had been zero, the economy would have expanded at 2.7%, slightly faster than the pace of our current expansion. Since that peak, labor force growth has come down substantially. As the forecast for 2025 shows, labor force growth is expected to remain stuck at 0.5% for the next decade. This means that, absent a surge in productivity, slow growth in the labor force will be a restraining factor on the U.S. economic speed limit.

Allison Schrager joins Brian Anderson to discuss how risk propels economic growth and why government efforts that go too far to mitigate risk undermine America’s economic vitality.

“Risk, for better and worse,” writes Schrager for City Journal, “is at the heart of economic growth, and successfully apportioning it—not avoiding it—is the key to prosperity.” While government has a role to play in managing risk, the U.S. economy has thrived by trusting markets to allocate it efficiently. Overly intrusive efforts to reduce risk in the economy—such as California’s new law regulating freelance or “gig” work—may prove counterproductive to workers of all incomes.

Searching for Infinite Economic Growth

 

It’s tempting to think some favored policy tweak will produce massively positive economic effects. But that usually isn’t the case. Even big policy changes often produce somewhat muted economic responses. When Congress passed big tax cuts back in 2017, President Trump said he saw “no reason” why economic growth couldn’t accelerate to as high as 6%. Yet growth in the ten quarters since the tax cut has averaged 2.6%, not much better than the 2.3% growth experienced over the previous ten quarters or the 2.5% averaged since 1990.

And that’s OK, writes scientist and policy analyst Vaclav Smil in The Financial Times. The whole economy can’t act like Moore’s Law, such that rapid and constants gains in computing power can be replicated “in other economic sectors and drive decarbonisation of energy, huge food production gains and a fourth industrial revolution.” He notes that “modern economies depend on an enormous range of inputs whose yields, performances and capabilities have been constantly improving; but only at rates an order of magnitude lower than the 30% growth dictated by Moore’s law.”

Smil notes, for instance, that corn yields have risen by 2% annually since the 1950s, efficiency gains for indoor lighting have averaged around 2.6% for decades, and gains in the efficiency of steel production have averaged less than 2% since 1950. Smil concludes: “Moderate growth, falling overwhelmingly between 1% and 3% and mostly between 1.5% to 2.5% annually, should be broadly reflected in the aggregates of economic outcomes. Indeed, it has been. Since 1950 the average growth of US GDP per capita (in real terms) has been about 2%.”

Who Stole Our 3% Economy?

 

Given Wall Street whispers of a very European 1-handle for second-quarter GDP growth, the Trump White House might well have been pleased with the (preliminary) 2.1% number. Although the economy slowed from Q1’s 3.1% pace, it was “a better-than-anticipated outcome,” according to JPMorgan. Thanks, American consumer! And thanks to American taxpayer, too, since solid government spending also helped.

But no thanks to American business, whose capital spending contracted by 0.6%. Another sign, perhaps, that the Trump trade war is offsetting the Trump tax cuts. (At least that’s JPMorgan’s theory.) While it’s good that the record-long economic expansion continues to roll in year ten, one led by consumer/government spending rather than business investment is not the boom you’re looking for.

And maybe “boomlet” rather than “boom.” Turns out that 2018 economic growth didn’t hit the Trump administration’s 2018 target of 3% or better after all, according to revised government data. Measured from the fourth quarter of 2018 to a year earlier, GDP growth came in at 2.5%. Even an alternate measure ⁠— total output for 2018 vs. total output for 2017 ⁠— shows growth fell just a bit short, increasing 2.9%. Yet as The Wall Street Journal points out, that figure “marks the strongest yearly pace of growth since 2015.”

US Economy Might Be Growing Faster Than We Think

 

The economics team at Goldman Sachs has made another run at trying to determine whether official statistics are undermeasuring America’s rapidly evolving digital economy. The bank now believes even more strongly that “technological change is not fully reflected in the real output statistics.”

From a bottom-up perspective, there’s all that missing growth from free digital goods. From a top-down perspective, Goldman economists note that the “growth of domestically generated profits and incomes (GDI) is outpacing that of GDP, a departure from earlier decades” and that “US profits generated in tax havens totaled over $300bn in 2018, some of which represents unmeasured domestic production.”

Even as the US Economy Produces More Jobs and Higher Wages, Somehow Capitalism Stays Broken. Weird.

 

Today’s populists overindulge in unwarranted economic nostalgia. For them, the immediate postwar decades were when America was really great. But maybe it’s a more recent period that they should be pining for. If you’re trying to make the case that “capitalism is broken,” then the Great Recession of 2007-2009 was your big moment. Capitalism seemed shattered, not just broken. It looked like this sucker was going down, to paraphrase President George W. Bush.

But then the economy started to recover, slowly but steadily. Indeed, the US expansion hit the 10-year mark this month and is on the verge of its longest-run on record if things stay on track through July. An economy that’s producing gobs of jobs every month — a total of 20 million since 2010 — as it grows year after year is a dodgy example of broken capitalism.

The Insatiable Appetite for Dour Data About a Decent Economy

 

If you look at the national unemployment rate of 3.6% — the lowest in more than 50 years — American capitalism doesn’t appear to be terribly broken. And as the economy has rebounded from the Great Recession and Financial Crisis, real wages continue to rise, especially so for lower-income Americans. Another seeming sign of non-brokenness.

Or to approach things a different way: A recent Federal Reserve survey finds 75% of U.S. adults say they are either “doing okay or living comfortably,” 56% say they are better off than their parents were at the same age (vs. 25% saying “about the same” and 19% “worse off”), and 64% rate their local economic conditions as “good” or “excellent.”

But none of those upbeat Fed survey findings were given the media attention of this one: Many adults are “financially vulnerable and would have difficulty handling an emergency expense as small as $400.” Specifically — and here I will use The Washington Post’s description of the survey results — “Almost 4 in 10 people (39%) said they wouldn’t be able to scrape together the cash to meet a $400 emergency expense” while 61% say they would cover it with cash, savings, or a credit card paid off at the next statement.

Algorithm Finds No “Trump Effect” on the US Economy, at Least Not Yet

 

So imagine an alternate reality where Hillary Clinton campaigned a bit more vigorously in supposedly safe Big Ten blue states and eked out a narrow Electoral College victory. So, no President Donald Trump. And also no tax cuts, no deregulation, no trade war. How would the US economy — which Trump describes as “stronger than ever before!” —  be performing right now? Or to put it another way: Is there an economic Trump Effect?

Well, not so much, according to “Stable genius: Estimating the ‘Trump effect’ on the US economy” by researchers Benjamin Born, Gernot Müller, Moritz Schularick, and Petr Sedlácek. Their conclusion: “The impact of President Trump on the macroeconomic performance of the US economy has been negligible so far. We measure neither an acceleration of growth nor increased job creation in the US economy relative to an appropriate benchmark.”

With no ready access to the multiverse of the Quantum Realm, BMSS tried a rather clever approach to this economic “what if” question. First they let an algorithm construct a “doppleganger” of the US economy by selecting a weighted combination of other advanced economies (with higher weights attached to Canada, the UK, Denmark, and Norway). This twin rhymed the US economy over the past twenty years, and served as a control for the experiment. They then compared the path of the US economy since the election of Trump to its doppelganger that did not get the “treatment” of electing Trump. And this was the result:

Things Are Getting Boomy: The Economy Is Jumping, and Worker Wages Might Soon Follow

 

I wrote yesterday about the upturn in Wall Street forecasts for second quarter GDP growth. Maybe the first 4% quarter since 2014 (5.2% in Q3). JPMorgan, for example, now estimates “real GDP is expanding at a 4.0% annual rate in Q2, up from our prior estimate of 2.75% and almost twice the 2.2% growth rate experienced in Q1.”

Sounds like welcome news to me.

But I did get some pushback on two fronts. First, a one-off quarter isn’t the same as sustained growth. Agreed. Indeed, there was a span from late 2013 through 2014 when three of four quarters were 4% or higher. Yet growth over the following three years averaged a meh 2.3%. (More on this issue in my blog post and subsequent Tweetstorm.)

For First Time Ever, US Has More Job Openings Than Unemployed Workers

 

While the DC press corps worries whether Trump was booed at a White House event and curates elaborate conspiracy theories about Melania, a slightly more important story isn’t getting enough pixels. The economy is doing so well that, for the first time ever, there are now more job openings in the US than unemployed Americans:

With employers struggling to fill openings, the number of available jobs in April rose 1 percent to 6.7 million from 6.6 million in March, the Labor Department said Tuesday. That’s the most since records began in December 2000.

The figures underscore the consistent strength of the nation’s job market. The unemployment rate has reached an 18-year low of 3.8 percent. Employers have added jobs for a record 92 straight months. And the abundance of openings suggests that hiring will continue and that the unemployment rate will fall even further. Not since December 1969, when the rate was 3.5 percent, has unemployment been lower than it is now.

The US Remains the World’s Most Competitive Big Economy, By Far

 

Nearly nine years into an economic expansion, most Americans continue to believe their country is headed in the wrong direction. Now that attitude probably reflects more than just economic perceptions. And even feelings about the economy’s vigor seem influenced by political leanings.

That said, there’s some evidence that economic pessimism is unfounded. There is, of course, the continued expansion. And the American jobs machine keeps generating gobs of jobs, resulting in the lowest unemployment rate since 2000.

USA #1 (in global competitiveness, according to new reports from the IMD World Competitiveness Center and the World Economic Forum). Image via Twenty20

Jobs Are Booming, and Democrats Are Puzzled

 

Is it overstating things to say the US economy is, well, booming? After all, the May jobs report was pretty impressive, including a) 223,000 new jobs, b) an uptick in average hourly earnings growth to 2.7% from a year ago, c) a downtick in the jobless rate to 3.8% —  at 3.755% unrounded, the lowest since 1969 — and d) a two-tenths decline in the U6 underemployment to 7.6% — its lowest level since 2001. JPMorgan economist Michael Feroli titled his Jobs Friday report this way (while alluding to President Trump’s controversial pre-report tweet): “The secret’s out: job growth is booming.” And some economists think a jobless rate with a two-handle is hardly out of the question.

True, overall economic growth is still stuck in Two Percentland. That’s the other, less-encouraging two-handle. But maybe not for much longer. GDP estimates for the second quarter are rising across Wall Street, and this report may boost that momentum. “Nearly all aspects of this report were positive and consistent with solid growth of wage-and-salary income in the second quarter,” notes the IHS Markit econ team. “The details in this report added one-tenth to our forecast of Q2 GDP growth, which now stands at 4.1%.”

Now superfast growth isn’t sustainable — deficit-financed fiscal stimulus will fade — unless we eventually see higher productivity growth, and that doesn’t seem to be happening yet. (Though there is AI-driven reason for optimism on that front.) The 1990s boom was particularly notable in that it was driven by massive productivity gains. But other than productivity growth — and I don’t mean to skip past it — how else would a boom skeptic quibble with the US economy right now? Probably like this analysis from left-learning Center for American Progress:

Another Way Driverless Cars Might Boost Economic Growth

 

One person can only know so much. And one person can only create relatively simple products on their own. Complex products require networks of people, sometimes called companies, and even networks of networks, such as supply chains. And one way of evaluating an economy is by its ability to create complex products.

In his book, “Why Information Grows,” Cesar Hidalgo writes about economies as “collective computers” whose computational capacity is either expanded or limited by the size of social networks. (I reviewed the book recently.) And the ability to create denser networks is helped or hindered by communication and transportation technology, among other things. All of which came to mind when reading the new working paper “The Role of Transportation Speed in Facilitating High Skilled Teamwork” by  Xiaofang Dong, Siqi Zheng, and Matthew Kahn:

This paper argues that China’s investment in High Speed Rail creates an integrated, regional system of cities close enough to travel by fast train but far enough to not be car friendly. We have studied the productivity impacts of cross-city transport improvements by focusing on publication and citation patterns of China’s university researchers. The empirical results in this paper show that once a city is connected into the HSR network, the researchers in that city will experience significant productivity increase in terms of quantity and quality of journal publications.

The Rise and Fall (and Rise?) of American Growth

 

Northwestern University economist Robert Gordon is one of the foremost tech/productivity/growth pessimists — he might prefer the term “realist” — with his views most fully expressed in his 2016 book “The Rise and Fall of American Growth.” It’s an excellent book. And if you read it and like it, then you might want to check out Gordon’s new NBER working paper, “Why Has Economic Growth Slowed When Innovation Appears to be Accelerating?”

It’s a compelling headline question given the apparent disconnect between economic statistics and what you read in the business media or hear from Silicon Valley. Now Gordon’s answer to that question is what you would expect if you’ve read his book or more generally followed his work. (Indeed, the paper provided a pretty good summary of his thinking.) His claim is that the “great inventions” of the Second Industrial Revolution — including electrification, the internal combustion engine, public sanitation, advances in chemicals and plastic — were really something, especially compared against subsequent waves of progress. These inventions, Gordon writes,

affected every aspect of life for businesses and consumers . . . and involved fundamental one-time-only changes in such basic dimensions of human life as location (from rural to urban), temperature (from alternating hot and cold to an even temperature all year round), and speed (from the hoof and sail of 1820 to the Boeing 707 of 1958).

The Potential Downside and Upside in Washington’s New Stimulus Experiment

 

So are we really going to do this? Is the United States, the world’s most important economy, really going to thoughtlessly stumble into a novel experiment in fiscal policy? Massive fiscal stimulus at this point in the business cycle?

Apparently so. Even before Trump’s tax cuts, America’s debt-GDP ratio was projected to rise to 91% of GDP over the next decade from around 77% currently and 35% before the Great Recession. Now factor in the tax cuts and this new budget deal and — assuming what’s temporary is made permanent — the debt burden would reach 109% of GDP in 2027, “higher than the previous record of 106% of GDP set just after World War II,” notes the Committee for a Responsible Federal Budget. And trillion-dollar deficits as far as the eye can see. Up, up, and away.

What’s Been the Economic Impact of Trump’s Deregulation Push?

 

“Pro-growth” economic policy is about more than just tax reform. Smart deregulation also has the potential to boost growth. Indeed, the Trump administration is counting on deregulation as a key lever for turning a 2% economy into a 3% (or higher) economy. In a report last October, the White House’s Council of Economic Advisers declared that “deregulation will stimulate US GDP growth” and favorably cites research finding that “excessive regulation” suppressed US growth by an average of 0.8% per year since 1980.

Of course, this doesn’t mean that Trump’s deregulatory efforts will boost growth by nearly a percentage point or anywhere close. But the study does suggest regulation might be sub-optimal in a number of areas. For instance, President Trump hopes cutting environmental and other regulations will help get more bang for the buck out of his new infrastructure plan.

Amity Shlaes joins Seth Barron to discuss the competing goals of economic growth and income equality, and to take a look at how American presidents in the twentieth century have approached these issues.

Polls show that support for income redistribution is growing among younger generations of Americans, but such policies have a poor track record of achieving their goals. As Shlaes writes in her feature story in the Winter 2018 Issue of City Journal: “Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight.”