Who says the U.S. economy can’t grow faster than 2 percent per year? Many liberal economists, perhaps embarrassed that the Obama White House presided over such a prolonged period of tepid gains, continue to make that case.
These people include Obama’s National Economic Council Director Larry Summers, who claimed in 2013 that the country had entered a period of “secular stagnation” and Jason Furman, chairman of Obama’s Council of Economic Advisors, who has called achieving Trump’s 3-percent growth target “extremely unlikely.”
Why do you care? Because policymakers under President Obama were guided by this pessimism and still rule the op-ed pages, arguing against pro-growth policies like the GOP tax cuts, for instance.
Their negative view of this country’s potential has cast doubt on President Trump’s efforts to bring manufacturing back to the United States, about the ability to put more Americans back to work and to ultimately rein in our deficits.
The pessimists say our growth is limited by an aging population and disappointing gains in output per worker. Former Fed Chairwoman Janet Yellen, for instance, told Congress last year that Trump’s goal of 3-percent growth was “challenging,” mainly because of disappointing productivity growth.
She claimed that to hit that target, productivity would have to be “something over 2 percent.” Guess what? A new study out by McKinseyshows that we may after all be on the cusp of just such a spurt in productivity. The projection is good news, especially for workers hoping for higher wages.
As Alan Blinder wrote in a 2015 op-ed bemoaning the slowdown in output per worker, “Productivity gains are the wellspring of higher living standards, and the well has been running pretty dry lately.”
How big is the shortfall? McKinsey reports that productivity growth in the U.S. between 2000 and 2004 advanced at 3.6 percent per year; between 2010 and 2014 it fell at 0.2 percent annually.
The authors suggest the drop was caused by the waning of a productivity boom that accompanied the dot-com revolution of the late 1990s and early 2000s as well as lagging demand after the financial crisis.
They say the third part of the puzzle is the muted impact from digitization. The increased computerization of everything and anything should boost productivity, but has not yet delivered expected gains, in part because of cannibalization of incumbent revenues and initial transition costs.
In other words, logic tells us that being able to order lightbulbs from Amazon in your pajamas at midnight makes everything about the process more efficient, but it may also put your local hardware store out of business.
The impact of increased digitization, while delayed, is likely to be enormous: The McKinsey report concludes, “Overall, we estimate that the productivity-boosting opportunities could be at least 2 percent on average per year over the next ten years, with 60 percent coming from digital opportunities.”
This is huge. For starters, the prognosis bats down the idea that the GOP tax cuts will not boost real growth but only prove inflationary. That’s a popular thesis on the left. Democrats who voted against the tax bill argue that we’re too late in the economic cycle to introduce the stimulus of lower taxes.
The notion is that with unemployment at 4 percent, higher demand will drive up wages and prices because real output gains are constrained. Our graying population, some claim, will limit growth. That is correct; our workforce is projected to increase only about 0.3 percent per year between now and 2035.
Three-percent growth therefore has to come from higher productivity and from greater workforce participation. Both are possible and even likely.
Some economists disagree, suggesting that the biggest technology boost is behind us. The dean of pessimism is Robert J. Gordon, professor at Northwestern University, who concludes in “The Rise and Fall of American Growth” that our best years are over.
Imagine: Despite the mind-boggling developments in artificial intelligence, reusable rockets, self-driving cars, robots and all the rest, Gordon thinks we have already enjoyed the main growth benefits from today’s technological breakthroughs.
Doubtful. As the McKinsey report details, the benefits are only delayed, in part by a dearth of investment by businesses during the Obama years.
Sluggish demand after the financial crisis held back spending on new plants and equipment, according to the McKinsey authors, as did “…political and regulatory uncertainty in the aftermath of the crisis…” Yes, the regulatory tsunami engineered by the Obama White House hurt our growth.
Workforce participation is also disputed territory. The percent of Americans over 16 years of age in the workforce — either employed or looking for work — stands at 62.7 percent, down from an all-time peak of 67.3 percent in 2000.
The recession brought the rate down; it has shown only a slight increase during this long expansion. There are many reasons cited for the drop, including an aging workforce. But there has also been a decline in participation among prime-age workers.
Optimists believe that rising wages are key to raising this figure, as well as policies that encourage work. It is remarkable that so many on the left are essentially pessimistic about the abilities and future of the United States.
One of the reasons Trump was elected is that he dismissed notions of American decline and has pushed to unleash the entrepreneurial energies of this country, which have never let us down. The McKinsey study suggests we are moving in the right direction.
Published on The Hill