Aaron Steelman and John A. Weinberg provide a useful overview of the biggest long-term economic question facing the US economy–and arguably the economies of the other high-income countries of the world as well–in their essay \”A “New Normal”? The Prospects for Long-term Growth in the United States.\” The essay appears in the just-released 2015 Annual Report of the Federal Reserve Bank of Richmond.
The essay has a nice readable overview of how economists have thought about the fundamental determinants of growth from the work of Robert Solow up through modern economists like Paul Romer, Charles Jones, and others. Here, I\’ll focus instead on how some prominent thinkers have phrased the current challenges of long-run growth. Here\’s the stage-setter:
\”To measure improvement in average standards of living, growth of GDP per capita is the standard yardstick. The post-war average of 3.4 percent overall growth translated to an average growth rate per capita of about 2.1 percent. … Since 2010, the U.S. economy has grown at a rate of roughly 2.1 percent annually, which translates to an average growth rate per capita of about 1.3 percent, both well below the post-World War II rates prior to the Great Recession and, perhaps more notably, far below what has been seen in “catch-up” periods following previous significant downturns.\”
What\’s the case for pessimism that the US is going to experience a long-term slowdown of long-run growth? The essay brings out the themes by discussing the work of two economists: Tyler Cowen and Robert Gordon.
\”As Tyler Cowen, an economist at George Mason University, put it in his 2011 book The Great Stagnation, the United States has “built social and economic institutions on the expectation of a lot of low-hanging fruit, but that fruit is mostly gone” and has been since roughly the early 1970s. In particular, he identifies three types of increasingly scarce “fruit”: free land, technological breakthroughs, and smart but relatively uneducated kids. Regarding the first, until the beginning of the 20th century, free and fertile American land was plentiful and not only “did the United States reap a huge bounty from the free land (often stolen from Native Americans, one should not forget), but abundant resources helped the United States attract many of the brightest and most ambitious workers from Europe,” Cowen writes. “Taking in these workers, and letting them cultivate the land, was like plucking low-hanging fruit.” Second, Cowen also sees technological innovation, and especially breakthroughs, as slowing. “Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago.” Third, in 1900, a very small percentage of Americans graduated from high school, while estimates of high school completion today range from roughly 75 percent to 90 percent. …
\”In addition to a slowing rate of innovation, [Robert] Gordon, as noted before, argues that the U.S. economy faces four big headwinds. First, there’s rising income inequality, which has reduced the share of economic gains going to the middle and working classes and with it their disposable income and purchasing power. Second, growth in educational attainment as measured by years of schooling completed has slowed and, among some parts of the population, decreased since 1970. In addition, the quality of primary and secondary education has become more stratified and the costs of higher education has increased. Such trends in education are themselves a contributor to the first headwind, growing income inequality. Third, the United States is experiencing significant demographic changes, most significantly many baby boomers are reaching traditional retirement age. That has reduced the number of hours worked per person. In addition, labor force participation among people who have not yet reached retirement age has dropped. Fourth, federal, state, and local governments face mounting debt, in large measure due to the aging of the population, as spending on “entitlement” programs such as Social Security and Medicare increases and pension obligations to public-sector employees grow. Gordon identifies two additional headwinds, which he thinks could be barriers to growth, though they are hard to quantify: “globalization,” which could add to growing income inequality, and global warming and other environmental issues, which could require significant resources to address.\”
That\’s a formidable list of concerns. But it\’s worth remembering that the term \”secular stagnation\” was first used by economists back in the 1930s, and the main concerns at the time included a lack of investment because of–at that time–lack of invention, lack of new resources and land, and slow population growth. But relatively faster growth arrived in the decades that followed, nevertheless. For example, it\’s notoriously difficult to predict whether and when new technologies will arrive, or how they will be commercialized. The essay notes:
[E]conomic historian Joel Mokyr … argues that there are many areas of science in which significant discoveries seem promising, among them molecular microbiology, astronomy, nanochemistry, and genetic engineering. And while it is true that there is no automatic mechanism that turns better science into improved technology, “there is one reason to believe that in the near future it will do so better and more efficiently than ever before. The reason is access.” Meaning, searching for vast amounts of information has become fast, easy, and nearly costless for researchers. Not only is the era of “Big Data” here but the ability to parse through the most arcane of data is no longer burdensome for people working on the frontiers of knowledge. On the question of whether all the low-hanging fruit has been picked, Mokyr argues that the analogy is flawed. As he puts it, science “builds taller and taller ladders, so we can reach the upper branches, and then the branches above them.” In other words, when a technological solution for a problem is found it often creates a new problem, which creates a new problem, and so on. “Each solution perturbs some other component in the system and sows the seed of more needs; the ‘demand’ for new technology is thus self-sustaining.”
Some of the issues that may be leading to slower growth are hard to move with policy tools, like lower birth rates and an aging population. But other factors affecting growth might be shifted. When I look at the state of US K-12 education, and higher education for that matter, it seems to me that the United States has substantial possibilities for gains in cognitive and noncognitive skills. The US could use a dramatic rise in research and development spending. Infrastructure investments could have substantial payoffs, although I\’ve argued on this blog that while fixing roads and bridges is fine, US economic growth in the 21st century is more likely to rely on information-related and energy infrastructures, along with planes and trains and ships, rather than just pavement and asphalt. The US economy has seen a decline over several decades in the rate of new-business startups, which in turn hinders job creation.
The optimistic case for at least a modest resurgence of long-run growth often starts by pointing out that when a major financial crises and a Great Recession hit at the same time, the recovery is likely to be slow, because so many firms and households all need to address the overload of debt they had previously built up. It then points to the possibilities of new technologies, intermixing and spreading in an interconnected global economy. And the optimistic view hopes for a supportive policy environment along the way. For example, this is more-or-less the position taken by Fed chair Janet Yellen in a speech earlier this week:
There is some evidence that the deep recession had a long-lasting effect in depressing investment, research and development spending, and the start-up of new firms, and that these factors have, in turn, lowered productivity growth. With time, I expect this effect to ease in a stronger economy. I also see no obvious slowdown in the pace or the potential benefits of innovation in America, which likewise may bear fruit more readily in a stronger economy. In the meantime, it would be helpful to adopt public policies designed to boost productivity. Strengthening education and promoting innovation and investment, public and private, will support longer-term growth in productivity and greater gains in living standards.
One other angle on the question of the growth slowdown involves what is being measured: specifically, are many people experiencing gains in their standard of living that aren\’t well-measured in the economic statistics? Steelman and Weinberg quote Angus Deaton on this point:
I…challenge the proposition that the information revolution and its associated devices do little for human well-being. Many have documented the importance of spending time and socializing with friends and family, but this is exactly the feature of everyday life that the new communication methods work to enhance. All of us can remain in touch with our children and friends throughout every day, videoconferencing is essentially free, and we can cultivate close relationships with people who live thousands of miles away. When my parents said good-bye to relatives and friends who left Scotland to look for better lives in Canada and Australia, they never expected to see or talk to them again, except perhaps for a brief and astronomically expensive phone call when someone died. Today, we often do not even know where people are physically located when we work with them, talk to them, or play with them. We can also enjoy the great human achievements of the past and the present, cheaply accessing literature, music, and movies at any time and in any place. That these joys are not captured in growth statistics tells us about the growth statistics, not about the technology.
My guess is that economic statistics have often understated the actual gains to individuals in the past, as well. The widespread presence of television, telephone, radio, and even the humble photograph and book allowed people to be in touch with others and with what Deaton calls \”great human achievements of the past and present\” in new ways, too. But the new information technologies have certainly ramped up these possibilities to a whole new level.
A final broad issue underlying economic growth is whether we wish to be a society that expects change, embraces change, and is designed to facilitate the dislocations of persistent change–or not.