Friday, June 10, 2011

What Can or Cannot Be Done About Economic Growth?

Over the past fifty years, the United States economy, as measured by real gross domestic product, has grown at a compound rate of growth of 3.1 per cent. 

Yes, there have been cycles in which economic growth substantially declined or expanded and in which unemployment rose and unemployment fell.

But, over this time period, the trend rate of economic growth remained relatively constant. 

Maybe we can’t do much about achieving greater trend economic growth in the United States.  Other countries are growing more rapidly over time than the United States but we used to talk about the convergence of growth rates.  Emerging or developing economies grew faster than the more developed countries, but as these countries matured their economic growth rates would converge to that of the more developed countries.

In this view there is not much that a “mature” country can do in order to achieve higher secular rates of growth.  Maybe the United States is “stuck” with a growth rate slightly in excess of three percent.

Another statistic that has caught my attention is the so-called under-employment rate.  Since the 1960s, this rate has grown dramatically to the point where one out of every four or one out of every five Americans of employment age (depending upon how you measure this condition) are either unemployed, employed part-time, or has dropped out of the labor force and is not looking for a job.

Of, course, the labor market has changed substantially.  For example, the participation rate in the work force has grown since the 1960s as more and more women have entered the work force, but even this number has dropped modestly.

These statistics came to mind this morning as I read (for the second day in a row) a very important article on the front page of the New York Times.  The article is “Companies Spend on Equipment, Not Workers.” (  “Workers are getting more expensive while equipment is getting heaper, and the combination is encouraging companies to spend on machines rather than people.”

But, this is not the whole story.  As one business owner is quoted in the article, “’People don’t seem to come in with the right skill sets to work in modern manufacturing,’ Mr. Mishek said, complaining that job applicants were often deficient in computer, mathematics, science and accounting skills. ‘It seems as if technology has evolved faster than people.’”

Another factor creating this divergence beyond just the evolution of technology, I believe, is the fact that the federal government has been spending lots and lots of dollars over the past fifty years to put people back into the jobs they lost either over the business cycle or as foreign competition grew.  Government spending to “keep the economy growing” or to protect US industries was good for the labor unions because it kept their base in tack, and it was good for the politicians because it kept the labor unions happy and kept the employees employed and happy.

But, it did nothing for the skills of the employment age people and it provided a promise to many joining the labor force that similar jobs would be available to them in the future and that their employability would be protected by this governmental policy.

Earlier this year, some test results of school age children around the world were released.  There was only one category that American students were first in the world in…”self-esteem.”  In almost everything else, the American student scored in the middle of the pack.  However, they believed they were the best.

Seems like we have a growing mis-match in the United States economy about what people expect about future employment opportunities and how young people are being educated to be prepared to work in the world of the twenty-first century. 

Stimulating the economy to put people back to work in the same jobs they lost is going to resolve only one problem…getting the politicians who proposed the stimulus re-elected.  As we have found out, this may be a “short-run solution” but it does not resolve the problem over time.  The attitudes in the society toward education must change and this is only a “long-term solution” that is not easily marketed in elections.

The same thing applies to “re-distribution” programs.  Housing and home ownership have been a major component of the economic policies devised by the federal government over the past fifty years.  Again, the justification for attempting to achieve these objectives…getting sitting politicians re-elected!

And, like the current disarray in the labor market, where is the housing market these days?

There are some things that can be achieved by economic policies and some things that cannot.  Over the past fifty years, the United States government has tried to force solutions on the United States economy that cannot be achieved. 

The effort to achieve higher rates of employment and home ownership over the last fifty years has resulted in a credit inflation that has produced the consequences we are now experiencing.  One of the reasons why this approach was taken was that there was not sufficient historical data or information available to provide insight into the problems and difficulties that such policies could produce.  This is one reason why Kenneth Rogoff and Carmen Reinhart conducted research over eight centuries to examine the “financial folly” that could lead to the justification for policies such as the ones that have been followed since the early ‘sixties.

One of the problems that come out of such “folly”, however, as Rogoff and Reinhart point out in their important book “This Time is Different,” is that a nation does not get out of such irresponsible behavior overnight.  

That is, a country cannot just “stimulate” itself out of the hole it has dug for itself. 

There are some things that a government cannot do with respect to generating more rapid economic growth.  Efforts to over-achieve in this area just result in longer-term misery.  Sometimes the prudent behavior is to stop digging the hole deeper.   

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