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NY Times, August 7 2016
We’re in a Low-Growth World. How Did We Get Here?
by Neil Irwin
One central fact about the global economy lurks just beneath the year’s
remarkable headlines: Economic growth in advanced nations has been
weaker for longer than it has been in the lifetime of most people on earth.
The United States is adding jobs at a healthy clip, as a new report
showed Friday, and the unemployment rate is relatively low. But that is
happening despite a long-term trend of much lower growth, both in the
United States and other advanced nations, than was evident for most of
the post-World War II era.
This trend helps explain why incomes have risen so slowly since the turn
of the century, especially for those who are not top earners. It is
behind the cheap gasoline you put in the car and the ultralow interest
rates you earn on your savings. It is crucial to understanding the rise
of Donald J. Trump, Britain’s vote to leave the European Union, and the
rise of populist movements across Europe.
This slow growth is not some new phenomenon, but rather the way it has
been for 15 years and counting. In the United States, per-person gross
domestic product rose by an average of 2.2 percent a year from 1947
through 2000 — but starting in 2001 has averaged only 0.9 percent. The
economies of Western Europe and Japan have done worse than that.
Over long periods, that shift implies a radically slower improvement in
living standards. In the year 2000, per-person G.D.P. — which generally
tracks with the average American’s income — was about $45,000. But if
growth in the second half of the 20th century had been as weak as it has
been since then, that number would have been only about $20,000.
To make matters worse, fewer and fewer people are seeing the spoils of
what growth there is. According to a new analysis by the McKinsey Global
Institute, 81 percent of the United States population is in an income
bracket with flat or declining income over the last decade. That number
was 97 percent in Italy, 70 percent in Britain, and 63 percent in France.
Like most things in economics, the slowdown boils down to supply and
demand: the ability of the global economy to produce goods and services,
and the desire of consumers and businesses to buy them. What’s worrisome
is that weakness in global supply and demand seems to be pushing each
other in a vicious circle.
It increasingly looks as if something fundamental is broken in the
global growth machine — and that the usual menu of policies, like
interest rate cuts and modest fiscal stimulus, aren’t up to the task of
fixing it (though some well-devised policies could help).
The underlying reality of low growth will haunt whoever wins the White
House in November, as well as leaders in Europe and Japan. An entire way
of thinking about the future — that children will inevitably live in a
much richer country than their parents — is thrown into question the
longer this lasts.
The first step to trying to reverse the slowdown is to understand why
it’s happening. A good way to do that is to re-examine predictions from
smart economists.
In January 2005, as it does every year, the Congressional Budget Office
released its forecast for the United States’ budget and economic outlook
over the decade to come. If the C.B.O.’s projections had come true, the
United States would have had $3.1 trillion more economic output in 2015
than it actually did — 17 percent more. Even if the steep contraction of
2008-2009 hadn’t happened, the shortfall would have been $1.7 trillion.
Forecasters Expected Much Stronger Growth Than Materialized
The Congressional Budget Office in 2005 predicted the economy would grow
much faster than it actually did, even excluding the impact of the 2008
financial crisis.
As a matter of arithmetic, the slowdown in growth has two potential
components: people working fewer hours, and less economic output being
generated for each hour of labor. Both have contributed to the economy’s
underperformance.
In 2000, Robert J. Gordon, a Northwestern University economist,
published a paper titled “Does the ‘New Economy’ Measure Up to the Great
Inventions of the Past?” It argued that the internet would not have the
same transformative impact on how much economic output would emerge from
an hour of human labor as 20th-century innovations like electricity, air
transport and indoor plumbing did.
It was a distinctly minority view in that apex of technological
optimism. “People said: ‘Productivity growth is exploding, Gordon.
You’re wrong; we’re in a new age,’ ” Mr. Gordon said. But as
productivity growth slowed several years later, “people started to take
my point of view more and more seriously.”
He offers the example of the self-check-in computer technology that
airlines use. When introduced in the early 2000s, it really did mean
greater productivity: Fewer airline clerks were needed for every
passenger. But the gain was more a one-time bump than a continuing trend.
Douglas Holtz-Eakin, director of the C.B.O. at the time of the 2005
forecast and now president of the American Action Forum, said technology
“just seems to be less special and more comparable to other forms of
investments than it had seemed.”
The forecasters thought the average output for an hour of labor would
rise 29 percent from 2005 to 2014. Instead it was 15 percent.
But it’s not just that each hour of work is producing less than
projected. Fewer people are working fewer hours than seemed likely not
long ago.
The unemployment rate is actually lower than the C.B.O. projected it to
be a decade ago (it saw it as stable at 5.2 percent; it was 4.9 percent
in July). But the unemployment rate counts only those actively seeking a
job. There were five million fewer Americans in the labor force —
neither working nor looking — in 2015 than projected.
An analysis by the White House Council of Economic Advisers last year
estimated that about half of the decline in labor force participation
since 2009 was caused by aging of the population (which was anticipated
in the projection), and about 14 percent from the economic cycle. About
a third of the decline was a mysterious “residual”: younger people
leaving the work force, perhaps because they saw little opportunity or
viewed the potential wages they could earn as inadequate.
Weak productivity and fewer workers are hits to the “supply” side of the
economy. But there is evidence that a shortage of demand is a major part
of the problem, too.
Think of the economy as a car; if you try to accelerate far beyond the
speed it’s capable of, a car won’t go any faster but the engine will
overheat. Similarly, if the voluntarily exit of people from the labor
force and lower-than-expected gains from technological advances were the
entire story behind the growth slowdown, there should be evidence the
economy is overheating, resulting in inflation.
That’s not what’s happening. Rather, global central banks are keeping
their feet on the economic accelerator, and that is not resulting in any
overheating at all.
The distinction is important if there is to be any hope of solving the
low-growth problem. If the issue is a shortage of demand, then some more
stimulus should help. If it is entirely on the supply side, then
government stimulus is not much use, and policy makers should focus on
trying to make companies more innovative and coax people back into the
work force.
But what if it’s both?
Larry Summers, the Harvard economist and a former top official in the
Obama and Clinton administrations, watched as growth stayed low and
inflation invisible after the 2008 crisis, despite extraordinary
stimulus from central banks. Even before the crisis, economic growth had
been relatively tepid despite a housing bubble, war spending and low
interest rates.
In November 2013, he combined those observations into a much-discussed
speech at an I.M.F. conference arguing that the global economy had, just
maybe, settled into a state of “secular stagnation” in which there was
insufficient demand, and resulting slow growth, low inflation and low
interest rates.
While the theory is anything but settled, the case has become stronger
in the last three years.
But it may not be as simple as supply versus demand. Perhaps people have
dropped out of the labor force because their skills and connections have
atrophied. Perhaps the productivity slump is caused in part by
businesses not making capital investments because they don’t think there
will be demand for their products.
Mr. Summers, in an interview, frames it as an inversion of “Say’s Law,”
the notion that supply creates its own demand: that economywide, people
doing the work to create goods and services results in their having the
income to then buy those goods and services.
In this case, rather, as he has often put it: “Lack of demand creates
lack of supply.”
His proposed solution is that the government sharply expand investment
in infrastructure, which might provide a jolt of higher demand, which in
turn could help the picture on supply — helping workers who build roads
and bridges become reattached to the work force, for example. As it
happens, increasing infrastructure spending is among the few economic
policies advocated by both Hillary Clinton and Mr. Trump.
Economic history is full of unpredictable fits and starts. When Bill
Clinton was elected in 1992, the internet, a defining feature of his
presidency, was rarely mentioned, and Japan seemed to be emerging as the
pre-eminent economic rival of the United States.
In other words, there’s a lot we don’t know about the economic future.
What we do know is that if something doesn’t change from the recent
trend, the 21st century will be a gloomy one.
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