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In a much-talked-about article in the current New York magazine, Benjamin Wallace-Wells suggests that the days of annual economic growth in excess of 3% are behind us. While I hate to rain on the parade of those who envision or embrace a world of more moderate growth (confession: I don’t, really), there is a patina of truth covering an otherwise speculative, sensationalistic piece that gives short thrift to the forces that ultimately determine growth and our standard of living.
First, let’s talk about the one spot-on observation in the piece, namely that demographics are slowing down growth. Since the 1970s, labor-market growth has turbocharged our GDP numbers. In the late 1960s the baby boom generation first reached adulthood and started looking for jobs, and shortly after that the feminist revolution helped millions of women enter the labor market as well. Together the two forces contributed to an annual growth in the labor market that at points in time exceeded 2%. If there are 2% more people working this year than last year, GDP will be close to 2% larger as well.
Rapid labor market growth meant that even the measly productivity growth of the 1970s and 1980s left us with annual GDP growth around our 3% historic norm.
In the 1990s, when the last baby boomer reached adulthood and women were more or less fully integrated in the work force, productivity growth jumped up to over 2.5%, meaning that the economy again grew smartly even with modest labor-market growth of 1%. Today, labor-market growth is approaching 0.5%, owing to relatively small 18-30 year-old cohort and the lack of urgency most of them have for entering the labor market.
Is this a disaster?
Hardly — although Wallace-Wells paints it as such. Per-capita economic growth is what matters for our standard of living, and in the long run it is inextricably tied to productivity. We should be concerned that productivity growth has waned a bit of late, and also that high productivity growth recorded in the last decade might have partly been an artifact of statistical bias, economist Michael Mandel convincingly argues. (The Bureau of Economic Analysis pointedly declines to disagree with Mandel, incidentally).
Short-term deviations from economic growth occur because of fluctuations in the business cycle, and the fact that we’ve not yet had a solid bounce from the last recession should give us hope that at some point we will see at least a couple of years of post-3% growth. But there is no reason for it to last much longer than that, because little has been done by the government to encourage the types of things that would create real gains in productivity. Lower energy prices from the shale revolution are fine, but only a small proportion of manufacturing firms have a manufacturing process that will greatly benefit from this change. A well-designed tax reform would no doubt give a boost to investment and productivity, but that doesn’t appear to be on the horizon. Greater economic integration at the global level would also give an uptick to productivity growth, but no one is holding their breath for that to occur either — few see the Transatlantic Free Trade Agreement coming to fruition any time soon.
To a large degree the administration has focused on short-term stimulus (a topic that came up in the president’s speech in Galesburg, Illinois, last week) as well as other reforms that do more to redistribute wealth rather than create it.
The telltale sign that Wallace-Wells missed the mark is his insistence that the massive gains in the standard of living in the U.S. had largely slowed by the 1970s, and that little has changed since that time. To a child of the 1970s this is manifestly untrue and at once reveals the author to be prosecuting a brief that is completely at odds with reality.
The decade of AM radio, country squire station wagons, lousy restaurants, and appliance repairman so ubiquitous that ours had a key to our house was so manifestly materially inferior to our current epoch that it’s almost a bother to refute it, although people like Julian Simon, David Cox and Michael Alms, and Steve Moore have done so in great detail. For instance, a greater proportion of people in the bottom income quintile in 2000 had air conditioning than the proportion of people in the top quintile in 1970. If that’s not a sign of material progress that reaches across the income distribution, then I don’t know what is.
The message that growth is over is not a new one, and it is one that the left is fond of embracing — and not in sadness. But they are right that economic growth does not just happen, and it is high time that we think seriously about what our government can do to get out of the way and usher in a resumption of business activity, investment, and steadily increasing standards of living.
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