The upside of economic pessimism

Economics by

Article Highlights

  • The disappointing first-quarter GDP report dashed hopes that 2013 might prove a breakout year for the US economy.

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  • Drilling down into the first-quarter GDP data reveals a tale of two economies.

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  • No economy ever failed from having highly educated workers and a thriving start-up culture.

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The disappointing first-quarter GDP report dashed hopes that 2013 might prove a breakout year for the U.S. economy. Even worse, the same-old-same-old anemic results provide another disturbing data point for gloomy New Normal theorists. Yes, economic statistics get revised. And last Friday’s output report was just government’s first pass. It wasn’t so long ago, however, that some Wall Street analysts were whispering about growth of nearly 4 percent. Instead the economy slogged again rather than surged, growing only 2.5 percent.

Caveat: Drilling down into the data reveals a tale of two economies. The public sector is in a depression. Government has subtracted from GDP for ten of the past eleven quarters, with spending falling at an annual pace of 5.6 percent over the past two periods. It’s better times for the bit of the economy that creates “actual consumer-relevant value,” as economist Tyler Cowen puts it. Private-sector GDP — excluding government consumption and investment — grew 4 percent in the first quarter and has averaged 3 percent growth over the past six months. Still, these should be the dragon years for the recovery. Even private-sector GDP is growing only at trend, its three-decade average. The anemic first quarter might be as good as it gets for 2013. If so, it will be another twelve months gone by without closing the massive shortfall between GDP’s pre-recession trajectory and where we are now. The growth gap continues.

If the Obama White House is correct, the good times really are over for good. In its recent budget proposal, Team Obama warned that in “the 21st century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth initially due to the retirement of the post–World War II baby boom generation, and later due to a decline in the growth of the working age population.” Obama economists are looking for real GDP growth of 2.3 percent in the final years of its budget projection, a full percentage point slower than the average growth rate of the past generation.

But demographics are not destiny. On the labor side, eliminating the payroll tax for older workers, for instance, could boost their workforce presence. Still, higher productivity and innovation are critical. Pessimists, such as Northwestern University’s Robert Gordon, worry that all the game-changing innovations — the combustion engine, electrification — have already been made. And maybe we’ve seen the best the IT revolution has to offer. Optimists, such MIT’s Erik Brynjolfsson and Andrew McAfee, argue that the pace of technological change — from robotics to machine intelligence — is accelerating, but they fret that workers and business models are failing to keep pace in the “race against the machines.”

Statistics are easy to cherry-pick. For instance: Is productivity growth continuing its 1990s surge or reverting to its slower 1970s pace? Well, productivity growth in the 2000s — Great Recession and all — was slightly faster than in the booming 1990s. But it’s downshifted since 2004. Another worrisome sign: Prices for IT equipment are declining at the slowest pace in over a generation, suggesting a slowing pace of technological advance. Then again, we are probably only in the first stages of puzzling out how to best use IT. During the second Industrial Revolution, it took factories 30 years — and the retirement of a generation of managers — to fashion how electricity could boost productivity over steam power. And who knows what advancements in genetic engineering and nanotechnology and energy are right around the corner?

For policymakers, it shouldn’t matter which view is correct. Just as Pascal saw only an upside in wagering that God exists, innovation expert Nick Schulz finds only benefits in assuming a “great stagnation” and acting accordingly. Hope for the best but prepare for the worst by reforming education and removing barriers to entrepreneurs. As Brynjolfsson and McAfee explain in Race Against the Machines, America needs to keep inventing new ways of combining technology and people to create new industries and jobs. No economy ever failed from having highly educated workers and a thriving start-up culture. That lethargic GDP report should motivate rather than discourage.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

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