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.” (http://www.nytimes.com/2011/06/10/business/10capital.html?_r=1&hp=&adxnnl=1&adxnnlx=1307710996-gxrbDaAG3hw1i6zHqy/zcw)  “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.   

The Short Term Myopia of the United States

Working in urban neighborhoods can be a very disheartening experience. There are so many problems that at times they can seem overwhelming.

One of the most discouraging problems that one runs into over and over again is the myopia that exists within some of these communities, a myopia that results in people making decisions as if there is no tomorrow.

Often these decisions can be captured within the context of game theory, specifically the “Prisoner’s Dilemma” game. The solution to a one-shot, simultaneous Prisoner’s Dilemma is for all players to default to the action that results in the worst decision for each player.

Researchers will explain the deterioration of housing within certain neighborhoods in terms of this kind of Prisoner’s Dilemma game. No one maintains, or “keeps up” their house because that is not the best decision given how they expect everyone else to act. And, there is no communication between actors so that people fail to “co-operate.”

People within the United States, as a whole, have become very myopic. This myopia grew in the latter part of the 20^th century and stands behind many of the problems we face today. We constantly read about two areas that have produced damaging results in the United States, yet, as with most one-shot, simultaneous Prisoner’s Dilemma games, most are barely aware of the role that this myopia plays. I would contend that these two major areas have to do with employment and the environment.

The United States has such a short-run view of employment that its governments throw billions of dollars into efforts to put people to work “right now” or to put people back to work “right now”. The emphasis on achieving “full employment” in the United States going back into the 1930s and 1940s has tended to get people employed as early in their lives as possible and to keep them in their same jobs throughout their working careers.

The consequence of this emphasis is that unemployment and underemployment have trended upwards in the latter half of the last century. Now, roughly one out of every ten individuals of working age are unemployed and one out of every four is underemployed.

The current solutions for reducing this unemployment and underemployment just advise “more of the same.” That is, more fiscal stimulus and printing more money.

These are just myopic attempts at resolving employment problems, myopic attempts that result from the myopic behavior of the politicians. After-all they have to get re-elected every two years…or every four years. So they must continue to pump up the economy.

But, this behavior just exacerbates the problem. And, it creates massive amounts of debt or money for the economy to absorb.

It has taken us a long time to get where we are and it will take a long time to get us out of this mind-set and out of this situation. A lot of what needs to be done relates to education and to everything that surrounds education…parents and teachers…and society itself.

Thomas Friedman has written several columns in the New York Times about the situation that exists in the education front in the United States and how it not only impacts us internally but how it impacts of relative to other nations. (His latest can be found here: http://www.nytimes.com/2010/11/21/opinion/21friedman.html?partner=rssnyt&emc=rss.)

Friedman reports of a speech from the secretary of education Arne Duncan: “One-quarter of U. S. high school students drop out or fail to graduate on time. Almost one million students leave our schools for the streets each year.” And Duncan comments on a report from a group of retired generals: “75% of young Americans, between the ages of 17 to 24, are unable to enlist in the military today because they have failed to graduate from high school, have a criminal record, or are physically unfit.”

America’s youth are now tied for ninth in the world in college attainment.

How are these young people going to fill jobs in companies that must face competitors that draw from a better prepared and better educated body of potential employees? How are companies going to develop and train people throughout their careers that do not have the appropriate base of skills? And, if these people do not seem to be coming along the pipeline, why shouldn’t the companies “outsource” to other countries where they have the educated workforce and will even have a more prepared workforce in the future?

Continual efforts to re-stimulate the economy and put under-employed people back into the jobs they formerly held is no solution to either the employment problem or the happiness of the worker. Unfortunately, the solution is a longer-run solution. For another look at the situation see “The Baseline Scenario” https://mail.gv.psu.edu/exchange/jmm27/Inbox/[BULK]%20%20The%20Baseline%20Scenario.EML?Cmd=open.

And, the same myopia applies to treatment of the environment and the efforts to develop sustainable business practices. Businesses are forced to focus just on the near-term, on their ability to grow and produce continually increasing profits. And, in doing so these businesses “mortgage” the future. Again, we have another one-shot, simultaneous Prisoner’s Dilemma game where most of the players default to the actions that will produce the worst results for all.

A great deal of the effort to produce a “green” outcome also, in my mind, tends to produce short-term fixes and look as if they just add costs to the accounting for the firm.

Again, education is crucial in environmental understanding. We are not talking here about knowing what the ecological problems are. We are talking about understanding what decisions are available and the externalities and network effects that surround the decisions we make.

But, as with the education, the consequences of our actions extend over many years and our decisions must take this future into account.

It is my experience that the decisions and actions surrounding these longer term decisions produce better results over time and also produce better managements because they take more factors into the making of decisions and the taking of actions.

In both of these cases, the emphasis on the “short-run” end up hurting individuals as well as hurting the economy. We get into situations like the one surrounding the resolution of the government debt problem. The argument is made that we need to spend more creating more debt so as to put people back to work. Yet, the additional deficits just create a “debt crisis” that interferes with putting people back to work.

Speeded up spending on solutions to ecological problems is a top-down approach that seems to substitute for companies changing their own behavior and decision-making processes.

Short-run America is losing out on the longer-term competitive battle. As Friedman continually reminds us, we continue to slide in all the measures of what makes a modern economy more competitive and live-able. The chances for becoming more competitive? Highly unlikely given the myopic behavior of our politicians.

The Need for an American Economic Strategy

The lead article in this week’s Business Week (November 10, 2008) is by Michael Porter, the Bishop William Lawrence University Professor at the Harvard Business School. Porter is calling for the next President to formulate an economic strategy for the United States.

Formulating and promoting such a strategy will help the country in two ways. First, it will start to provide some leadership to the country in economic affairs…leadership that has been sorely missing in recent years. Second, it will provide a framework that “embodies clear priorities” and will lay out an understanding of the strengths that the United States needs to preserve and the weaknesses that threaten the prosperity of the United States the most. Porter strongly argues that the “United States lacks a coherent strategy for addressing its own challenges.”

I could not agree more that the new President needs to provide strong leadership in establishing the goals and objectives to be strived for in the area of economic strategy and needs to direct everything that he does to reflect the effort to attain these goals and objectives. In my experience running companies or leading organizations I felt it was my responsibility as the leader of the organization to make clear what we were striving for and then back up this vision with my performance: that is by being consistent with this vision in all my actions and in all my statements.

Let me now highlight what I think are the most important things in Porter’s list of what should be included in the economic strategy. I can’t argue with the general thrust of what Porter says, but, of course, I have my own priorities. I will discuss three specific areas: education, innovation and entrepreneurship, and global integration.

This country was founded upon the spread of information and the role that education plays in this spread. To me, the modern world really started when moveable type was invented because this allowed for the printing of books and pamphlets and newspapers and all sorts of other things. With this invention, information spread and people got to read things they had never seen before and compare ideas in a way they never had a chance to do before. With this new knowledge they could debate different theories, see and compare different data sets, and argue and debate and dialogue. The result was the Reformation, the Counter-Reformation, the Enlightenment, Modernity, and even Post-Modernity along with many other less well known movements.

The founding of America was also a result of this spread of information and early on it was argued that a democracy such as this should have an educated people so that they could be aware of the issues being faced by the country and could intelligently elect their leaders. Being able to read was also considered to be very important in establishing the type of moral climate that would support a democratically elected government. Being able to read meant that citizens could read the Bible for themselves and interpret it for themselves…something that was not always allowed in the Old World. Schools…and colleges were important…education was stressed. And so major institutions of higher learning were established…Harvard, Yale, Columbia, Princeton, the University of Pennsylvania, and William and Mary, to name a few.

Americans found out later that having schools and colleges contributed to the expansion of knowledge and the expansion of knowledge was good for innovation and the expansion of trade. Technical schools and colleges evolved. And, this allowed for information to continue to spread and for new ideas to circulate and for new things to be tried…and the country grew and prospered.

The American success story hinges to a great deal on the creation, evolution, and enhancement of higher education in the United States. But, Porter writes, “America now ranks 12th in tertiary (college or higher) educational attainment for 25- to 34-year-olds. We have made no progress in this vital area over the past 30 years, unlike almost every other country.”
He goes on, “All Americans know that the public education system is a serious weakness….In the global economy, just being an American is no longer enough to guarantee a good job at a good wage. Without world-class education and skills, Americans must compete with workers in other countries for jobs that could be moved anywhere.” Early in this decade I spent four years taking classes in Princeton. I was amazed to see who populated the Firestone Library. I could not argue that Americans were even a significant minority in attendance there. I have also noticed a similar situation at Penn State’s main campus. Education is not a major priority of Americans these days, yet Americans will be the first to decry the movement of jobs elsewhere in the world.

Innovation and entrepreneurship have been the workhorses of the American economy. Porter writes, “The United States has an unparalleled environment for entrepreneurship and starting new companies.” He adds, “United States entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world.” We have this engine as the primary driver of American growth and prosperity. Yet, “America’s belief in competition is waning.” Also, there is resentment and fear directed at new ways of doing things and new directions of research. People on the edge of their professions or fields of study are referred to as “elites”, as “celebrities”, as “anti-religious.” Change threatens people. New ideas threaten people. People that others don’t understand threaten people.

America is facing a split, as are other areas of the world. See my post, “The Split in America,” October 29, 2008, http://masepoliticalcommentary.blogspot.com/. We cannot allow the environment of innovation and entrepreneurship that has existed in the United States to fall away. The next President of the United States must work hard to ensure the continued presence of an environment that is receptive and encouraging to those that want to step out and take chances.

Finally, the next President must work to encourage a feeling of trust and partnership within the world community when it comes to economics and finance. For too much of the past eight years or so, America has tended to act unilaterally when it comes to policies and programs related to international trade and finance. The United States can no longer continue to do this. The current world crisis, if it shows anything, shows that the world is too integrated and nations are too dependent upon one another to act in any other way than in partnership with one another.

People believed at one time that other major economies could “disconnect” from the United States if the United States wanted to continue acting independently of them. This has proven to be a fallacy. Somehow, someway nations and the leaders of nations are going to have to work together to begin to build, even the most elemental and rudimentary parts of, a world system. We can all retreat into our own little shells like the nations did after World War I. But, like they found out then, this can only lead to further conflict and possibly an even worse war. American, even though it remains the largest economy and the most powerful nation in the world, must act as a partner and help to build up other nations, not ignore them or put them down.

The next President has a lot of business already on his plate. But, if America is going to move forward, the next President is going to have to show some leadership. Porter writes that “America’s political system, especially as it has evolved in recent times, almost guarantees an absence of strategic thinking at the federal level. Government leaders react to current events piecemeal, rather than developing a strategy that unfolds over years.”

The next President can deal in this little area or that little program or with this little disturbance if he wants to. What America really needs, however, is for the next President to give us a vision…something we can get behind…so that we, at least, know what direction he is trying to move us in.

“Now is the moment when the United States needs to break this cycle,” Porter cries. Now is the moment for some leadership.

Mr. President-elect…go for it!