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My friend Steve Moore, Heritage Foundation chief economist and former Wall Street Journal writer, doesn’t like the conservative idea of cutting the tax burden and increasing take-home pay of American parents by expanding the child tax credit. For one thing, he says, “reform conservatives would raise top marginal tax rates to pay for it,” a supposed supply-side no-no. But as Ramesh Ponnuru points out: “The leading proposal to expand the child tax credit, that of Senator Mike Lee, cuts the top marginal tax rate, and makes up the lost revenue by shrinking tax breaks and flattening tax rates.”
Moore outlines other objections in a his recent American Spectator piece. He worries too few Americans are paying federal income taxes and even fewer would pay under this new plan. But that view ignores federal payroll taxes, excise taxes, and the burden workers bear from the corporate tax. In fact, Moore suggests making all those non-income tax payers start paying taxes. Moore: “The better way to go is to ensure that nearly everyone—except the very poor—pays at least some income tax.”
So the Republican Party — tagged as the “party of the rich” — should head into 2016 with a plan to cut taxes on the rich and raise them on working class Americans? Hmm. (And by the way, there doesn’t seem to be any evidence that turning people into non-income tax payers nudges them into greater support for expanding government.)
Anyway, what should the GOP pitch to the middle-class be, according to Moore? This: cutting the top income tax rate would boost GDP growth, which in turn would broadly boost middle-class incomes. Moore:
My friend April Ponnuru, a prominent reformicon, says that Republicans have “nothing to say to a mother with three kids” in the bottom half. Yes, we do: it’s called growth and opportunity, which come from businesses and jobs, which come from things like supply-side tax cuts. These dots aren’t that hard to connect.
I am having trouble connecting those dots. The tax reform plan recently put forward by Rep. Dave Camp would lower the top marginal rate to 25% from 40% (including a 10% surtax on the rich), but would likely increase the size of the economy by less than one percent over the next decade. Deeper cuts might boost the economy more, but advocates need to explain how they’ll pay for them. Plan beats no plan. And, please, show you math. What’s more, trends in globalization and automation might mean that while modestly faster GDP growth increases average incomes, median incomes might not rise as much or at all.
Then there’s the possibility that many Americans just don’t believe the traditional supply-side message. Did Mitt Romney’s plan to deeply cut top tax rates really win many votes? And a recent poll found that just 40% of respondents said high-end tax cuts would boost growth vs. 58% for the minimum wage. When incomes for the top 1% have risen by 200% over the past three decades vs. for 40% for the middle class, it’s not surprising that Americans wonder about the wisdom of cutting top tax rates.
But as Ramesh Ponnuru puts it, “There is no reason we cannot have a tax code that is more pro-growth, more pro-family, simpler, and fairer than the current code. Senators Lee and Rubio are working toward that goal. Why not join them?” Indeed, conservative reformers would combine an increase in the child tax credit and other income tax reform with bold business tax, anti-cronyist regulatory, and education reform for a modern economic agenda to meet 21st century challenges. Smart politics, even better policy.
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Just what are the economic benefits and costs of high-skill immigration? It’s a good time to consider the question. Although most attention surrounding President Obama’s impending executive action has focused on illegal immigration, it will also have a high-skill component. From Fox News: “The plan calls for working with the State Department to expand visas for foreign-born workers with high-tech skills, to support U.S. businesses. This is projected to offer another half-million immigrants a path to citizenship.”
Details are sketchy, but according to The Hill, “One idea floated by the industry would recapture and issue unused green card numbers that expired from previous years, potentially freeing up 200,000. Another would allow people who have been approved for a green card to apply to work even when there is a wait for their visa number.”
Importing more smart and skilled people — and letting the ones already here stay longer — would seem self recommending, but it might not be that simple. In the new paper “The Effect of High-Skilled Immigration on Patenting and Employment: Evidence from H-1B Visa Lotteries,” researchers Kirk Doran, Alexander Gelber, and Adam Isen find that winning the H-1B, high-skill visa lottery has “an insignificant average effect on patenting,” meaning these new workers may not make firms move innovative. But the team considers this the marquee finding:
On employment, our paper is the first to our knowledge to document evidence that H-1Bs displace other workers. In most specifications, the estimates indicate substantial and statistically significant crowdout of other workers within one year of the start of the visa. Thus, over this time frame our findings generally rule out the scenario in which one additional H-1B visa immigrant leads to an increase in total firm employment of greater than one, and they generally rule out the claim that an additional approved H- 1B visa has no negative effect on the employment of other workers at the same firm.
In other words, these new high-skill workers tend to replace the existing workforce, perhaps at lower wages. They compete rather than complement. This is a contrarian finding, as the report concedes. Indeed, AEI’s Madeline Zavodny has conducted research suggesting that 100 additional H-1Bs are associated with 183 more jobs among US natives. And the authors also offer this caveat:
The majority of H-1B workers—including those in our sample—do not have the advanced degrees that would be most closely associated with innovation. Many H-1Bs are not in scientific industries, and among the 56.43 percent that are in scientific industries, many H-1B workers perform jobs (e.g. technical support) that might not be expected to lead to patenting in the overwhelming majority of cases. … It is also possible that other types of high-skill immigration, such as O-1 visas given to those with “extraordinary abilities” or proposals to encourage advanced degree holders to stay in the U.S., have more positive effects on patenting or employment.
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The Atlantic recently conducted its first Silicon Valley Insiders Poll, where a panel of 50 executives, innovators, and thinkers answered questions on technology, innovation and more. Below are the biggest barriers to innovation, according to the panel. As you can see, the number one answer was government regulation/bureaucracy:
This should be no surprise, given what recent research has turned up on regulation’s effect on innovation, entrepreneurship, and economic growth. Take the research from Antony Davies at Mercatus that shows more regulated industries produce lower growth. Or the report from Ian Hathaway and Robert Litan at Brookings that finds there has been a long term decline in entrepreneurship in the US (as Jim Pethokoukis points out in his post). Hathaway and Litan comment on their report:
[W]e have speculated in comments since our report that mounting regulation – from all levels of government – could be one factor frustrating job reallocation while tilting against entrepreneurship. Younger, smaller firms do not have the resources that larger, more established firms do to hire full-time attorneys or compliance officers, which should put them at a progressively larger competitive disadvantage as regulations continue to grow in number and complexity.
Regardless of whether you’re talking about small businesses or Silicon Valley entrepreneurs, it’s hard to innovate and branch out if you’re mired down with complex and onerous regulations. Here’s Ashwin Parameswaran’s take in an interview with Pethokoukis:
We have too many regulatory barriers to new firms starting up. It’s too expensive for new firms starting up in many parts of the economy. To give you two very obvious examples: finance and healthcare, where the notion of a start-up is an oxymoron. In most parts of these sectors, you’d have to spend a few million dollars on lawyers and dealing with regulators before you could start a new business up. That’s a huge barrier to entry.
It’s true in a lot of other places. I think in some instances, it’s much worse in the United States than it is in places like the United Kingdom. A great example would be occupational licensing and the sort of regulations you have on food, which are probably a little bit more lax in the United Kingdom. One of the criticisms I get a lot from people is that people assume that I am talking about Silicon Valley entrepreneurs. … [B]ut I’m talking about much more mundane and widespread innovation: the small entrepreneurs, the people who start up food carts on the street or the people who want to run small farms doing something interesting.
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It matters, I think, if the rich are mostly getting richer because (a) technology and globalization enables more value creation or (b) they’re able to somehow manipulate the system. French economist Thomas Piketty thinks it’s (b), and this rent-seeking by the 0.1% is resulting in stagnation for the 99.9%. As he writes in “Capital in the Twenty-First Century”:
The increase in very high incomes and very high salaries primarily reflects the advent of “supermanagers,” that is, top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labor. One possible explanation of this is that the skills and productivity of these top managers rose suddenly in relation to those of other workers. Another explanation, which to me seems more plausible and turns out to be much more consistent with the evidence, is that these top managers by and large have the power to set their own remuneration, in some cases without limit and in many cases without any clear relation to their individual productivity, which in any case is very difficult to estimate in a large organization.
In a must-read National Review piece, researcher Tino Sanandaji argues that Piketty has the story wrong, specifically his claim that 60 to 70% of top 0.1% income comes from these “supermanagers.” The study Piketty cites as evidence does not suggest what Piketty thinks it suggests. The study in question is “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data” by Jon Bakija, Adam Cole and Bradley Heim. And it concludes:
The data demonstrate that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005
Here’s the problem, according to Sanandaji: The study includes self-employed business owners among executives and managers. The study does not show whether the top earners were entrepreneurs running their own companies or hired executives. But the tax data used by the authors does allow the authors, as Sanandaji explains “to make a rough division between “salaried” and a “closely held business,” in which the owners receive pass-through income.”
And when you do tha drill down, you find that of the 0.1%, (a) 27% were “executives, managers, and supervisors” in closely held companies, plus entrepreneurs and farmers, (b) 20% were salaried “executives, managers, and supervisors” outside the financial sector, (c) 18% were in finance, (d) 1% belonged to various groups of professionals (lawyers, doctors, management consultants, computer scientists, engineers, academics and top earners in art, media and sports).
The claim that 60–70 percent of top earners are salaried corporate executives whose compensation is determined by their hierarchical superiors is thus shown to be incorrect. Neither entrepreneurs nor hedge-fund managers fit Piketty’s definition of the “supermanager.” The type of big-business supermanager Piketty describes would almost entirely belong to the category of salaried executives and managers. But this group only includes 20 percent of top earners, and even this category contains many wealthy entrepreneurs. (The occupation description in the tax data used in this study classifies the chairman of Microsoft and the CEO of Amazon as salaried executives.) …
In the discussion of top 0.1 percent earners, Piketty explicitly says the following: “‘Superentrepreneurs’ of the Bill Gates type are so few in number that they are not relevant for the analysis of income inequality.” This is not the case. It would be more accurate to write that corporate executives are so few in number that they are not relevant for the analysis of income inequality. … The $18 billion earned by the 7,000 salaried executives working for the largest American corporations equals the collective earnings of merely the ten best-paid hedge-fund managers last year!
But maybe lots of those superwealthy business owners are the scions of the founders, rather than the founders themselves. Piketty claims that inherited wealth constitutes 60 to 70% of billionaires. Not so, says Sanandaji:
One of the main sources of data on top wealth is the Forbes list of billionaires. According to Forbes’s classification, around 70 percent of American billionaires are self-made in the sense that they did not inherit large fortunes. The Forbes estimates are quite problematic for Piketty’s theory, which predicts that most top wealth should be inherited.
Maybe Piketty’s depiction of the superrich applies to France, which has a fourth as many self-made billionaires per million people as America. Anyway, Sanandaji concludes:
Piketty certainly has a point in that the Right tends to use “entrepreneurs” as poster boys to justify inequality. Many of the rich are not, in fact, entrepreneurs. It’s not clear to me that recent the explosion of speculative finance and real-estate constitutes socially productive innovation. Even when it comes to productive entrepreneurship, it is by no means a given that any level of inequality can be justified by entrepreneurial innovation.
Ayn Rand had her protagonists invent amazing sci-fi technology that no one else can replace in order to justify no moral boundaries to the wealth share “creators” claim. That’s all well and good in her stories, but how should we think of distributional issues if the rich don’t invent super-steel and perpetual-motion machines?P
But there are also obvious problems associated with the other extreme — totally ignoring entrepreneurs. Piketty’s Capital creates an alternative universe where the rich consist of rentiers born with a silver spoon in their mouths and big-business CEOs who serve themselves raises with the same. This image of the rich is convenient for the Left, but inaccurate. Leaving out entrepreneurs leads Piketty astray in several places.
I looking forward to the response from Piketty or his supporters.
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When the possibility of deflation is dismissed or even welcomed, it reminds me of a “Curb Your Enthusiasm” episode. If I recall the plot more or less correctly, Larry David was trying to join a Republican country club for some reason. Anyway, while pretending to be a stereotypical GOP rich guy — the rich part was easy since David in real life is worth nearly a billion dollars — he made the following dismissive remark about global warming, “People like it a little warmer, don’t they?”
Hey, people like lower prices right? What’s wrong with a little deflation? I, for one, love paying less for a better flat screen TV. And wasn’t there deflation during the booming late 19th century? The thing is, though, there is good deflation and bad deflation. A helpful primer from The Economist:
A short spell of deflation driven by cheaper oil would in some circumstances be a tolerable thing. Indeed there are times when deflation can be a symptom of encouraging underlying developments. It can, for example, be brought about when advancing productivity enables the economy to produce more goods and services at lower cost, raising consumers’ real incomes. There were several such periods of “good deflation” while the world was on the gold standard; with growth in the money supply constrained, prices were pushed down whenever the volume of output grew rapidly. Michael Bordo and Andrew Filardo, two economic historians, point to America’s 1880s as a period of “good deflation”, with output rising by 2% to 3% a year from 1873 to 1896. For all the aggregate benefit, though, falling real wages hurt workers in many sectors.
By contrast bad deflation results when demand runs chronically below the economy’s capacity to supply goods and services, leaving an output gap. That prompts firms to cut prices and wages; that weakens demand further. Debt aggravates the cycle: as prices and incomes fall, the real value of debts rise, forcing borrowers to cut spending to pay down their debts, which ends up making matters worse. This pathology did great harm during America’s Great Depression, which was when Irving Fisher, an economist, diagnosed it under the name “debt deflation”. Deflation in Germany at the same time, though eclipsed in the common memory by the damage done by the hyperinflation of the 1920s, caused a number of multiple bank collapses. The resulting unemployment, wage cuts, and credit crunch helped radicalise workers and fed support for the Nazis.
Which of those situations better describes what’s happening in the eurozone right now? And when US prices were falling in 2009, was that due to technological innovation or a collapsing economy? I’ll be honest, the distinction seems pretty obvious. Yet too often — at least on the right — deflation is treated as if it were always and everywhere a good thing. But how do policymakers figure out whether deflation is good or bad? Scott Sumner frames it this way: “In my view deflation is neither good nor bad, just irrelevant. On the other hand falling NGDP matters a great deal, and should be avoided.” So have the Fed — preferably through a market-driven tool like a NGDP futures market – target the the level of total spending in the economy at 4-5% a year. Supply-side factors would determine what share nominal GDP growth is real GDP.
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Changes in economic conditions, government transfer programs, and federal tax laws have resulted in after-tax income growing at different rates across the income spectrum over time. For households in the lowest quintile of before-tax income, inflation-adjusted after-tax income was 48 percent higher in 2011 than it was in 1979, CBO estimates. Cumulative growth in the inflation-adjusted after-tax income of households in the 21st to 80th percentiles, the 81st to 99th percentiles, and the top 1 percent of the before-tax income distribution was an estimated 40 percent, 67 percent, and 200 percent, respectively.
So middle-class incomes — as defined here — rose by 40% in real terms — and are today about where there were prerecession. All of which can be seen in the above chart. Another CBO finding: inequality is lot less when you take into account transfers and taxes. As Scott Winship tweeted: “Taxes & transfers lowered U.S. Gini from .59 to .44 in 2011. … Latter is up, but only from .36 in 1979″:
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It’s perhaps more extreme than we thought. From “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data” by Emmanuel Saez and Gabriel Zucman:
This paper combines income tax returns with Flow of Funds data to estimate the distribution of household wealth in the United States since 1913. We estimate wealth by capitalizing the incomes reported by individual taxpayers, accounting for assets that do not generate taxable income.
We successfully test our capitalization method in three micro datasets where we can observe both income and wealth: the Survey of Consumer Finance, linked estate and income tax returns, and foundations’ tax records.
Wealth concentration has followed a U-shaped evolution over the last 100 years: It was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012—a level almost as high as in 1929. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined.
The increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality. Top wealth-holders are younger today than in the 1960s and earn a higher fraction of total labor income in the economy. We explain how our findings can be reconciled with Survey of Consumer Finances and estate tax data.
This is a new finding. As The Economist notes, “Earlier studies of American wealth have tended to show only small increases in inequality in recent decades.” Rather than dispute the data, let’s consider a different question: Does it matter how the wealthy got so wealthy? Did they inherit it or create it? Does the mix matter? The authors note, “Due to data limitations we cannot provide yet formal decompositions of the relative importance of self-made vs. dynastic wealth, and we hope our results will motivate further research in this area.”
But the fact that the rich are younger today than half a century ago — despite an aging population aging — may provide a clue. Also consider than the US has 3-4 times as many billionaire entrepreneurs per million citizen as other large advanced economies. Such high-impact entrepreneurship creates a more dynamic, prosperous country.
But here is a counterpoint from The Economist:
Yet one should not yet rule out the return of Mr Piketty’s “patrimonial capitalism”. The club of young rich includes not only Mark Zuckerbergs, the authors argue, but also Paris Hiltons: young heirs to previously accumulated fortunes. What’s more, the share of labour income earned by the top 0.1% appears to have peaked in 2000. In recent years the proportion of the wealth of the very rich held in the form of shares has levelled off, while that held in bonds has risen. Since the fortunes of most entrepreneurs are tied up in the stock of the firms that they found, these shifts hint that America’s biggest fortunes may be starting to have less to do with building businesses, just as Mr Piketty warned.
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The United States has an imperfect Internet. There is little competition in wired broadband, limited mostly to a cable company and a telecom carrier offering less powerful DSL access. Consolidation is shrinking the number of players further. And mobile broadband, while more advanced than in most other countries, is not yet a real competitor for fast fixed broadband.
The cable companies that provide most fast broadband have a clear motivation to discriminate against content from rival sources to protect their business model. And their combination with programmers like NBC increases the risk of discriminatory treatment.
But these shortcomings won’t be fixed by regulating the flow of content on the Internet like electricity through the wires or voices traveling down a phone line. Stopping unreasonable discrimination can be done at a lower cost, on a case-by-case basis that does not imperil perhaps the most important objective of all: extending the Internet to all Americans.
President Obama is right when he argues that the broadband companies connecting Americans to the Internet “have special obligations not to exploit the monopoly they enjoy over access in and out of your home or business.” In the absence of more competition, this will have to be monitored by regulators. But the monitoring should be performed at the least possible cost.
Again, what it comes down to is increasing the level of competitive intensity. Oh, that and who pays to upgrade internet infrastructure. AT&T CEO Randall Stephenson, today, via Reuters:
AT&T Inc will stop investing in new high-speed Internet connections in 100 U.S. cities until regulators decide whether to enact tough “net neutrality” rules proposed by President Obama, Chief Executive Officer Randall Stephenson said on Wednesday. … “We can’t go out and invest that kind of money deploying fiber to 100 cities not knowing under what rules those investments will be governed,” Stephenson said at an analyst conference.
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The US and China have struck a big climate deal. The key details from the New York Times:
As part of the agreement, Mr. Obama announced that the United States would emit 26 percent to 28 percent less carbon in 2025 than it did in 2005. That is double the pace of reduction it targeted for the period from 2005 to 2020. China’s pledge to reach peak carbon emissions by 2030, if not sooner, is even more remarkable. To reach that goal, Mr. Xi pledged that so-called clean energy sources, like solar power and windmills, would account for 20 percent of China’s total energy production by 2030.
1.) So did the US and China “just agree to save the world?” as one news headline framed it? Even if you believe unchecked greenhouse gas emissions are probably bad for Earth and the people who live on it — and I do — this agreement alone is no silver bullet. Vox quotes one climate modeler’s conclusion that even assuming the US and China hit their targets, “this deal in isolation still puts the world on course for a likely 3.8°C (6.8°F) rise in temperatures” Of course, the hope among climate worries is that this announcement will recharge the push for a global climate agreement now that the world’s top carbon emitter is in the game.
2.) Can the US hit its goal? Michael Levi of the Council on Foreign Relations outlines the challenge:
If the United States hits its current target – 17 percent below 2005 levels by 2020 – on the head, it will need to cut emissions by 2.3-2.8 percent annually between 2020 and 2025, a much faster pace than what’s being targeted through 2020. That is a mighty demanding goal. It will be particularly challenging to meet using existing legal authority – which the administration says can be done. It’s also worth observing is that achieving these goals will almost certainly require changes to the implementation of the EPA power plant regulations. This would be particularly true if the automobile fuel economy rules are relaxed when they’re reviewed in a few years.
Ben Adler of Grist offers a similar take:
It will be necessary to finalize power-plant rules — the centerpiece of Obama’s Climate Action Plan — that are as strong, if not stronger, than what is already proposed.
A Hillary Clinton EPA might be helpful here, but what about one in a Chris Christie or Scott Walker administration? And he GOP-controlled Congress might also try to make things harder by, Adler adds, “mulling ways to impede the power-plant rules by defunding the regulatory process.”
3.) And what about China’s side of the deal? I asked AEI’s Derek Scissors for his quick take:
It’s not ambitious. First, it’s something they have floated previously, and it still gives them enormous amounts of room to raise emissions.
Second and more important is that they probably won’t raise emissions that much regardless of what they say to the US. Their emissions growth has slowed dramatically due to a slowing economy.
That’s a really great point. China would have a tougher time hitting that emissions target at a 8% growth rate than at a 4% pace. Recently, economist Larry Summers coauthored a paper arguing that history suggests fast growth is tough to maintain, especially for authoritarian states with economies still saddled by too much state control and cronyism. Like, you know, China’s. And in a new analysis, Scissors argues that “combination of inaction and daunting challenges threatens the end of China’s economic rise.” Among them: too much debt, declining productivity, a shrinking labor force, an aging society, and this:
Perhaps most striking, inefficient state-owned enterprises are intended to cooperate more with private firms. What is badly needed is exactly the opposite: far more open and fair competition between the state and private sectors.
The much-touted Shanghai Free Trade Zone, symbol of financial transformation, reached its one-year anniversary, accomplishing little beyond drawing speculators. Labor reforms have been offered but are slow and partial, when daring is required in light of China’s rapid aging. Last month, the 2014 edition of the Party plenary meeting was caught up in internal political issues and barely discussed the economy.
So, in a way, China’s agreement is a reflection of an economy shifting into lower gear.
4.) I would hope the Republican response would elevate above the usual reflexive skepticism of climate science. The GOP should consider a“no regrets” energy and environment policy embracing natural gas, nuclear, and solar. Maybe nuclear fusion, too. Government would have a modest but important role to play in areas such as basic research and regulatory reform. As researcher and pro-nuclear blogger Kristy Gogan puts it:
The question is this. How can we best respond to the twin challenges for our time: climate change, caused by energy consumption, and poverty, caused by lack of access to energy? Until we recognize that these challenges are mutually dependent, we will never win the battle for hearts and minds. … Climate campaigners need a new narrative that recognises the rights of half the world to access the electricity we take for granted, whilst being realistic about what it will take to replace the world’s existing fossil fuel infrastructure…and then double it.
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Goldman Sachs offers its two cents on the Great Stagnation debate:
– Weak productivity growth over the last few years has led some commentators to conclude that the future trend is likely to be well below the average historical rate of 2.2%. In today’s note, we offer a historical and a model-based view of the prospects for productivity growth over the next five years.
– We first take a historical approach, asking simply whether the recent trend or the long-run average provides a better guide to future productivity growth. We find that forecasts based on long-run averages tend to produce smaller errors, and that forecasters have tended to attach too much weight to recent trends over the last couple of decades.
– We then update our productivity “growth accounting” model. We find that the contribution of highly cyclical capital services largely explains the disappointing productivity growth of the last few years, but should normalize going forward. Assuming that long-run trends in technological improvement hold up–a source of considerable uncertainty–trend productivity growth of 2% still seems about right.
One of those gloomy analysts Goldman refers to is Northwestern University’s Robert “Is Economic Growth Over?” Gordon. Now as it happens, he has a new analysis out. In it, Gordon says the headwinds of demographics, education, inequality and debt “will reduce the growth rate of real GDP per capita from the 2.0 percent per year that prevailed during 1891-2007 to 0.9 percent per year from 2007 to 2032. Growth in the real disposable income of the bottom 99 percent of the income distribution is projected at an even lower 0.2 percent per year.”
In other words, the economy in coming decades will look pretty much like it has since 2000. But Gordon stresses he does not think productivity growth will wane: “In my numbers there is no forecast of a future technological slowdown—productivity growth adjusted for educational stagnation is predicted to be just as fast during 2007-2032 as during 1972-2007.” It’s just that technology-driven innovation won’t do much to boost productivity. Facebook is not the internal combustion engine. And Gordon is skeptical that policy can substantial alter this trend:
Now is the time to start trying to understand why the future pace of potential real GDP appears to be so slow, and whether anything can be done about the headwinds, particularly demography, inequal ity, and debt, that drag down income growth for the bottom 99 percent so far below the slowing rate of overall growth. The techno-optimists are whistling in the dark, ignoring the rise and fall of TFP growth over the past 120 years. The techno-optimists ignore the headwinds, which seems ostrich-like in their refusal to face reality.
There is little that politicians can do about it. My standard list of policy recommendations includes raising the retirement age in line with life expectancy, drastically raising the quotas for legal immigration, legalizing drugs and emptying the prisons of non-violent offenders, and learning from Canada how to finance higher education. The U.S. would be a much better place with a medical system as a right of citizenship, a value- added tax to pay for it, a massive tax reform to eliminate the omnipresent loopholes, and an increase in the tax rate on dividends and capital gains back to the 1993-97 Clinton levels.
But hypothetical legislation, however politically improbable, has its limits. The headwinds that are slowing the pace of America’s future economic growth have been decades in the making, entrenched in many aspects of our society. The reduction of inequality and the eradication of road- blocks in our educational system defy the cure-all of any legislation signed at the stroke of a pen. Innovation, even at the pace of 1972-2014, cannot overcome the ongoing momentum of the head-winds. Future generations of Americans who by then will have become accustomed to turtle-like growth may marvel in retrospect that there was so much growth in the 200 years before 2007, especially in the core half-century between 1920 and 1970 when America created the modern age.
Amazing that Gordon pays so little attention to creating a more dynamic free-enterprise system. Productivity growth will need to accelerate above recent trends if the US is going to grow — and living standards to rise — in the future as it has in the past. And it needs to be the sort of empowering, product innovation that is more likely to create a broader prosperity. Vibrant entrepreneurship and openness to innovation form the deep magic of the US economy. More of that, please!