June 18, 2016
Greg Mankiw used his NYT column to discuss the weak growth the U.S. economy has experienced over the last decade and goes through five explanations. To my view there’s not much complicated about the story. We lost a huge amount of demand when the housing bubble collapsed and there is nothing to replace it. That is essentially #4, presented as secular stagnation by Larry Summers. Regular BTP readers know the story well, so let me briefly comment on the other four.
The first one, that the economy actually is growing rapidly but we are missing it because the gains are not picked up in our measurements, really flunks the laugh test. The items identified are things like getting music and information free on the web or being able to use our smart phones as cameras. These are great things, but if you try to put a price tag on them (in the old days most people would buy a cheap camera every ten years or so), they are pretty small.
Furthermore, there were always benefits from new products that weren’t being picked up (also costs — try getting by without a cell phone — the need for a cell phone and the monthly service is not included as a negative in the data), what these folks have to show is that the annual size of these benefits has increased. If you want to be generous, give them a 0.1 percentage point of GDP and tell them to shut up.
The crisis hangover story is also widely told. Firms are scared to invest, banks are scared to lend. This one also seems to defy the data. First, until the recent downturn in investment following the collapse of oil prices and the rise in the trade deficit following the run-up in the dollar, investment was pretty much back to its pre-recession share of GDP. Banks are also lending at their pre-recession rate. So it’s a nice story to humor reporters, but there is nothing in the world to support it.
The same is true of number five, blaming government policy. We’re supposed to believe that the tax increases put in place by President Obama on the richest 1 percent (in 2013), slowed growth for the prior four years and will impede it indefinitely going forward? These tax increases were much smaller than the one imposed by President Clinton which we remember also brought growth to a halt. This is just silly. It is certainly plausible that tax increases can have a negative incentive effect and therefore impede growth, but the orders of magnitude just don’t fit. It would be hard to imagine that Obama’s tax increase slowed growth by even 0.1 percentage point.
Finally we have Robert Gordon’s argument that we are faced with a future of slow productivity growth because the age of innovation is over. This is hard to accept for many reasons, perhaps most importantly that economists (including Gordon) have been terrible at predicting trends in productivity. But another point that should bother the true believers is that growth has slowed everywhere. Gordon’s story about the dearth of important new innovations could perhaps explain slower growth in the countries that were at the edge in adopting new technology, like the United States, but why has growth slowed almost everywhere else in the world, including countries that are very far from the cutting edge? They should still be seeing large benefits from adopting the technologies that we have had in place in the U.S. for two or three decades.
In short, there doesn’t seem much that is confusing in this picture. The world economy needs more demand to have faster growth. Or we could accomodate the lack of demand by reducing supply with shorter workweeks and longer vacations, thereby making labor markets tight and putting upward pressure on wages. But that’s a simple story which won’t employ many economists — and might put more pressure on politicians. Hence we have five stories, four of which don’t make much sense.
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