Thursday, April 01, 2010

(yet another) Herald of Doom...

"Superstar" Robert Gordon chimes in...this is getting tiresome. Yes, there will be many more shoes to drop, but U.S. institutional structures enjoy a special resiliency due to the cathartic effects of the populace's ability to elect officials. I suppose we should not blame them, as these kinds of forecasts, if they come to fruition, make careers. How many articles have you read with the words "Mr. Roubini, who predicted the Global Financial Crisis..."

My comments are in italics in relevant sections below.

Obama and America’s 20-year bust
Mar 31, 2010 06:51 EDT

It is an alarming, jaw-dropping conclusion. The U.S. standard of living, says superstar Northwestern University economist Robert Gordon in a new paper, is about to experience its slowest growth “over any two-decade interval recorded since the inauguration of George Washington.” That’s right, get ready for twenty years of major-league economic suckage. It is an event that would change America’s material expectations, self-identity and political landscape. Change in the worst way.

We have "superstar economist" and "suckage" in the first paragraph...this does not bode well.

Now it’s not so much that the Great Recession will morph into the Long Recession. More like ease into the Great Stagnation. As Gordon calculates it, the economy will average only 2.4 percent annual real GDP growth over that span vs. 3 percent or so during the previous 20 years. On a per capita basis, the economy will grow at just a 1.5 percent average annual rate vs. 2.17 percent between 1929 and 2007.

A 20 year prediction regarding GDP growth. The professor uses the Japanese case.

That might not seem like much of a difference, but it really is. Over time, the power of compounding would create a huge growth gap measured in the trillions of dollars. To look at it another way, assume you had an annual salary of $100,000. If you received a 1.5 percent raise each year, you would be making $134,000 after 20 years, $153,000 after 40 years. But a 2.17 annual raise would boost your income to $153,000 after 20 years and $236,000 after 40 years.

yes, the power of compounding. What about more lumpy growth? Say 3.0% in the first ten years and 0% in the following 10 years? The reverse case? Ah, but then we run into problems rolling into other packages of time, which are not very tractable when analyzed in discrete and arbitrary packages of time.

For Gordon, the culprit is weaker productivity. Productivity, economists like to say, isn’t everything — but in the long run it is almost everything. A nation’s GDP growth is little more than a derivative of how many workers the nation has and how much they produce. And if Gordon is correct, U.S. productivity is about to weaken. He forecasts that over the next two decades, the metric will grow at just a 1.7 percent annual rate. From 1996-2007, economy-wide productivity averaged just over 2 percent with GDP growing at 3.1 percent.

Productivity is presently growing, but I take the point that this is his metric.

Gordon’s argument is simple: The productivity surge starting in the 1990s was driven primarily by the Internet, though drastic corporate cost-cutting in the early 2000s helped, too. Going forward, though, Gordon thinks the IT revolution will be marked by diminishing returns. He concludes, for instance, that most of the product innovations since 2000, like flat screen TVs and iPods, have been directed at consumer enjoyment rather than business productivity. (Also not helping are a more protectionist trade policy and a tax code where the penalties on savings and investment are about to skyrocket with rates soaring 60 percent on capital gains and 200 percent on dividends.)

Most of the innovations? Quantify. Trade policies can change. Tax codes can change. These policies are not monolithic...they are dynamic. The present administration (which I am at odds with on a variety of issues) has not exactly shied away from tinkering with policy.

All this dovetails nicely with research showing financial crises are followed by negative, long-term side-effects such as slow economic growth and higher interest rates. Lots of debt, too. Indeed, researchers Carmen Reinhart and Kenneth Rogoff find advanced economies with debt-to-GDP ratios above 90 percent grow more slowly than less-indebted ones. (Japan is the classic example.) America is on track to hit that level in 2020, according to the Congressional Budget Office.

Finally he mentions Japan, but I think we are putting the effect before the cause when we say "countries grow slower with debt/GDP above 90%. Japan's is near 200%, and is not nearly as dynamic as the U.S.

But maybe Gordon is wrong. Productivity has been surprisingly robust during the downturn, helping the overall economy (though not the labor market) weather the storm better than most expected. Maybe nanotechnology or genetic engineering will be the next Internet and ignite further creative destruction. Yet even if Gordon is correct, Americans still control their own economic destiny.

Very good. The point is that from Malthus to Marx there has never been a shortage of theorists who arbitrarily choose factors that will grow or decline and conclude that, all things being equal, their pet factor will destroy society as we know it. The problem is that other factors, such as innovation, can grow exponentially as well. The U.S. has a very long history of this kind of innovation (intellectual capital). We are also tolerant of immigration (human capital). It is a mistake to assume a society that adapts as well as the United States will simply stop innovating, declilne in productivity, and gently go off into that good night.

Since the 2008 election, American economic policy has been about wealth preservation (keeping the economy from sliding into a depression) and wealth redistribution (healthcare reform.) Wealth creation? Not so much. That needs to change. Washington needs to focus on growing the economy and competing with the rest of the G20 nations, including the other member of the G2, China. Every policy — from education to trade to the tax code — needs to be seen through that lens.

This is beginning to sound like a college essay.

America faced a similar turning point a generation ago. During the Jimmy Carter years, the Malthusian, Limits to Growth crowd argued that natural-resource constraints meant Americans would have to lower their economic expectations and accept economic stagnation — or worse. Carter more or less accepted an end to American Exceptionalism, but the 1980 presidential election showed few of his countrymen did. They chose growth economics and the economy grew.

Well, Malthus shows up here.

Now they face another choice. Preserve wealth, redistribute wealth or create wealth. Hopefully, President Barack Obama will choose door #3. Investing more in basic research (not just healthcare) would be a start, as would slashing the corporate tax rate. A new consumption tax would be better for growth, but only if it replaced the current wage and investment income taxes. Real entitlement reform would help avoid the Reinhart-Rogoff scenario. The choices made during the next few years could the difference between America in Decline or the American (21st) Century.

A basic re-hash of current thinking. I am going to go ahead and publish this as it does serve as a good example of how to frame a title for garnering attention.

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