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Growth Weighed Down by Inaction

This New York Times article builds on themes raised by our presentation, “Flawed Assumption and Grand Experiments.”
Back when “Gunsmoke” was on TV and Lyndon Johnson was president, the United States economy managed to storm ahead by nearly 5 percent a year for nearly a decade. What we would give to recover some of that power!

During Ronald Reagan’s presidency two decades later, the rise in the economic cycle, coming out of what was then the worst downturn in the post-World War II era, averaged a bit over 4 percent a year. By the time George W. Bush lived in the White House, the rebound from recession delivered an average growth rate of under 3 percent.

You want to know how much bounce it has now? In the seven years since the United States emerged from the Great Recession under President Obama, annual growth has averaged just about 2 percent.

The bad news? Unless business and government do something to improve the economy’s underlying capability, the United States will be lucky to achieve even that paltry growth rate over any sustained period of time.

“The growth we have experienced has gained from a massive cyclical tailwind,” Lawrence H. Summers, the former Treasury secretary who also served as President Obama’s chief economic adviser, told me.

But that cyclical tailwind — bolstered by putting idle resources back to work, which brought the unemployment rate down to 5 percent from 10 percent — is spent. The jobless rate will not fall from 5 percent — close to what economists consider full employment without excessive inflation — to zero.

What remains is an economy at the mercy of two powerful dynamics. The first is a gradual shrinking of the work force as a share of the population, as it is squeezed by successive waves of retiring baby boomers and no longer gaining from the one-time surge of women into the paid work force in the 20th century. The second is a persistent decline in productivity growth over the last dozen years.

Lakshman Achuthan of the Economic Cycle Research Institute adds it up this way: Over the next five years, labor force growth of half a percentage point plus productivity growth of half a percentage point will push the economy ahead at the anemic pace of just 1 percent a year.

Even the Congressional Budget Office’s modest projection that the economy will grow by 2 percent a year over the next 10 years is excessively optimistic, he argues, relying on a tripling of the rate of productivity growth from its average of the last five years.

The Federal Reserve was able to help engineer a recovery from the recession, but there is little the Fed can do to change the economy’s underlying prospects. “Monetary policy can’t deal with structural problems,” Mr. Achuthan said. “The litmus test for any policy is, what impact does it have to improve productivity or demographic growth?”

America’s stagnant outlook is important: Debt is a bigger burden in slow-growing economies. Paying for a growing number of retirees becomes more onerous. How the pie is divided becomes a tougher political problem in economies that don’t grow.

This stagnation, exacerbated by the fact that most of the income gains the economy has managed to achieve have gone to the upper crust, underlies much of the anger coursing through the public this election year.

On its own, raw growth isn’t enough. But without decent growth, combined with policies to maintain low unemployment, there is little prospect of improving the fortunes of the less well-off.

While Donald J. Trump exploits that anger, his grab bag of proposals — deporting a large share of the work force; offering multitrillion-dollar tax cuts, mostly for the rich, that would only further widen inequality; blocking trade with much of the world; maybe raising the minimum wage, maybe not — would do nothing to bolster growth. But don’t worry, it will be great.

Hillary Clinton, who has put together a coherent platform focused on raising the incomes and enhancing the economic security of middle-class families, has steered clear from addressing the very real danger of low growth over the coming decades. Instead, she has promised to put her husband, who presided over the burst of growth in the late 1990s, in charge of economic policy.

Voters should not let the candidates avoid the tough questions: What, if anything, can and should be done to enhance the economy’s ability to grow? Should the prospect of long-term stagnation inform policy more directly?

At the very least, the dismal forecast calls for the government to prepare for another bout of fiscal stimulus. The recovery by now is already seven years old. With interest rates near rock bottom, the Fed would have little room to prevent another spike in unemployment if the economy were to falter.

“If there is a cyclical downturn in a year or in the next several months, there would be nothing in that shotgun,” said Alan S. Blinder, a former vice chairman of the Fed who is now at Princeton. Mr. Blinder has put together a careful set of proposals to refurbish the fiscal policy toolbox in case the economy takes a tumble and stimulus is needed quickly.

“Students learn in Economics 101 that lower taxes and/or higher levels of government spending can mitigate recessions by boosting aggregate demand,” he writes. “That simple Keynesian idea should be no more controversial today than Darwinian natural selection or global warming.”

But it is. Many Republican politicians reject all three ideas. And as long as the G.O.P. is in control of Congress, that party will have its hand on the nation’s spending levers.

The long term is even more challenging.

Some experts, like John G. Fernald, a senior researcher at the Federal Reserve Bank of San Francisco, share the view of the budget office that productivity will advance by roughly 1.5 percent a year, returning to its average pace since 1970. That would mean little more than 2 percent annual growth.

Is that the best the United States can do? Not necessarily.

Productivity has slowed to a large extent because hiring is growing faster than capital investment. That means each new worker is most likely not just less skilled but also has less capital to work with, less help from machinery or software to increase output and generate income. One way to increase productivity would be to provide an incentive for capital investment, perhaps with a business tax overhaul that would lead corporations to repatriate the money they are keeping abroad.

Relaxing restrictions on educated immigrants would also increase entrepreneurship and investment. Subsidizing child care might encourage more mothers to return to the work force faster. Eliminating onerous regulations — things like occupational licenses that restrict eligibility for a variety of jobs and overly tight zoning laws that prevent the building of new homes — would improve economic efficiency and equity.

More focused training could substantially enhance the human capital of the work force. Public investment to revamp the nation’s crumbling infrastructure would not only produce jobs for underemployed construction workers, it would also deliver a big productivity boost.

How much bang would this deliver for our bucks? Mr. Summers says better policies could add from a half to a full percentage point to growth. And he holds out hope that substantial investments in advanced technologies that have not yet shown large productivity benefits will eventually do so.

But even with the best of intentions, cautions Douglas W. Elmendorf, a former Congressional Budget Office chief who is now dean of the Kennedy School of Government at Harvard, “we are not going to get back to 3 percent with anything we know how to do now.”


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