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Since World War Two, South Korea is the only large country to get rich for the first time. The rest are microstates. Once promising strivers like Argentina and Thailand have all fallen victim to the “middle-income trap.” And China is a likely addition to that list, according to AEI’s Derek Scissors: “It would not be unusual if there were cities in China with income levels similar to, say France. It would be highly unusual for China as a whole to reach French levels of income. … The single most likely result is that China will share the fate of many other economies and fall far short of being wealthy.”
It’s not just that China is aging rapidly. Beijing has increasingly favored state intervention over market reforms as its path to greater national prosperity. The result is an economy where debt is high and productivity may be flat or falling. Here is Scissors on possible actions and implications if the stagnation scenario plays out:
An indispensable, if perhaps boring, step is to avoid making the same mistake made with the Soviet Union, whose decline was missed until very late. The U.S. needs a concerted effort to compile statistics on the Chinese economy that are as independent as possible of those published under the Party’s auspices. This will help explain Chinese behavior that will otherwise seem mysterious or, worse, surprising.
A stalled China will be more a lost opportunity than a dangerous development for the U.S. economically. American financial exposure is comparatively minor. China’s trade role as a gigantic but low-margin manufacturer is a luxury, rather than a necessity; other countries played this role before and can again. The enormous opportunities many hoped for as China grew wealthy will not materialize but the country will still be very large and have nearly bottomless needs for elderly care and environmental technology, among other things. American companies will see fortunes shift, but government action is unnecessary.
An interesting twist is that stagnation could induce heavier Chinese investment in the U.S than if the country was thriving. Lack of opportunities at home could push Chinese firms and individuals to seek greener pastures elsewhere, forcing American policy-makers to decide how much Chinese investment is wanted and in what fields.
Some American friends and allies will suffer more from Chinese economic weakness; indeed, energy and metals exporters around the world already have. The obvious policy response is for the U.S. to try to build its trade and investment ties with countries such as Australia and Brazil, as well as large parts of sub-Saharan Africa. In strategic terms, a stagnant China does not guarantee American global leadership. Instead, it guarantees that either the U.S. provides global leadership or there is none. The dollar provides the most prominent example. A China that does not fully liberalize capital movement is more likely to stall. The RMB will then fall well short of challenging the dollar and the dollar’s future as the world’s reserve currency will remain almost entirely in American hands. This implication applies broadly
What happens when one of these cars is involved in a fatal accident? Imagine this terrible scene: The car ahead of you, its back seat packed with children, screeches to a halt, and your car’s software directs your car to take a sharp right to avoid it, hitting and killing a pedestrian.
Who is morally responsible? And who decides whether the car is programmed to change course, take the sharp right, and reduce the fatalities? The programmer working for the car company? The Department of Transportation? Congress? Whether to turn right is a question undergraduate philosophy majors grapple with every semester. The technology of driverless cars would centralize the decision. But the decision would still have to be made.
Say this tragedy repeats itself only a few times per month. The number of traffic fatalities plummets relative to today. But since this is a new technology, the media reports on each death. A slow, steady drip of bad news ensues. Click-friendly headlines abound: “Driverless cars kill again.” How long until an ambitious state attorney general runs for governor on a platform of outlawing driverless cars? At what point does the federal bureaucracy step in with burdensome regulation? When the lawsuits pile up, how do the courts respond?
Still, though, the economic benefits of driverless cars would be enormous. The improvement in people’s daily lives would be significant. While it’s easy to imagine government slowing technology’s march, it’s hard to imagine government shutting it down.
Three thoughts here. First, there is huge potential upside. With high penetration rates, research suggests, driverless technology could save 22,000 lives a year and $450 billion annually.
Second, one could also see a “bootleggers and Baptists” scenario develop with public-minded interest groups (maybe robo-apocalypse worriers or “for the children” types) allying with cronyists or rent seekers (this massively disruptive a technology is going to make some incumbent somewhere unhappy) to bring down the heavy hand of government regulation.
Third, there is a big difference between driverless cars where can you take naps or immerse yourself in a book and near-driverless cars where the driver must remain alert and ready to act. But humans aren’t very good at such passive observation. This from a New Yorker piece on challenges posed to airlines by automation and growing pilot inattention:
The more a procedure is automated, and the more comfortable we become with it, the less conscious attention we feel we need to pay it. … If anyone needs to remain vigilant, it’s an airline pilot. Instead, the cockpit is becoming the experimental ideal of the environment most likely to cause you to drift off.
In the cockpit, as automated systems have become more reliable, and as pilots have grown accustomed to their reliability—this is particularly the case for younger pilots, who have not only trained with those systems from the outset of their careers but grown up in a world filled with computers and automation—they have almost inevitably begun to abdicate responsibility on some deeper level. “It’s complacency,” Casner said. “If a buzzer goes off, I’ll do something about it. If it doesn’t, I’m good.”
The July, 2013, crash of Asiana Airlines Flight 214 as it attempted to land in San Francisco is a recent example. None of the four pilots on board had noticed that the plane was coming in too slowly. “One explanation is they had the automation configured so that something like this couldn’t happen,” Casner said. “They truly believed it would keep flying that airspeed.”
In my new The Week column, I discuss the challenges of Jeb Bush’s call for a 4% GDP growth target:
But political potshots aside, there’s good reason to doubt whether Jeb Bush or Hillary Clinton or any other politician has a magic formula for growth. The Federal Reserve, Congressional Budget Office, and Obama White House all see growth closer to 2 percent than 3 percent as a more realistic expectation for the 21st century American economy. Private forecasters see the same permanent slowdown. In a new note, economic consulting firm IHS Global Insight calls growth rates of 3 percent “relics of the past” for advanced economies like America’s.
Why? Well, about half of U.S. growth in the postwar era has come from higher productivity, and half from a growing labor force. But American society is getting older and working less. Given much slower labor force growth, much higher productivity is needed to make up the difference. If productivity growth just stays at its postwar average — and it’s been much slower lately — the economy’s growth potential is much lower than in the past. As economics blogger Bill McBride writes, “Right now, due to demographics, 2 percent GDP growth is the new 4 percent.”
The above chart illustrates the previous graph. In the 1960s, fast labor-force growth made it easier to grow at 4%. Today, slow labor-force growth limits potential GDP. (So, too, slow productivity growth.) Of course, as I also explain in the piece, smarter policy can probably help. I assume Bush is thinking the same thing. We’ll see what he comes up with. Demographics aren’t necessarily destiny here.
I was on Bill Bennett’s always-excellent “Morning in America” radio program today, and a caller asked me — basically — to provide talking points on why the 1990s Clinton economic boom “wasn’t really that good.” (The caller probably wanted ammo against liberal coworkers or relatives when they used Bill Clinton’s economic record as reason to support Hillary Clinton.) My response was, “Well, the Clinton years really were pretty good!”
How could I say otherwise? Why would I say otherwise? The economy grew by nearly 4% annually during the Clinton years, creating 24 million jobs and driving the unemployment rate to a superlow 3.9%. Incomes and stocks were way up, inflation and interest rates were way down. Budget deficit? What budget deficit?
Perhaps the most common criticism of the Clinton boom, at least on the right, is that it was “bubble economy” inflated by easy money and irrational enthusiasm for technology stocks. Even as Clinton was leaving office, the bubble was popping. Clinton inherited an expansion from Bush I, and bequeathed a recession to Bush II. The problem with that line of criticism is that despite bear market and recession, the productivity boom kept booming from 1996 through 2005. And the tech craze left us some pretty important companies including Google and Amazon. Beneath the froth, some really lasting and important stuff was happening.
But there is more to the story, of course. A few things comes to mind: First, income inequality soared, and the”financial industry exploded,” as the Washington Post puts it. Two WaPo charts:
Kind of ironic given the emerging themes of Hillary Clinton’s candidacy. Certainly there is an argument that some seeds of the financial crisis were sown during the Clinton years.
Second, Bill Clinton’s “bond market strategy” to boost growth didn’t really seem to click until the GOP took over Congress.
Third, Reaganomics arguable deserves some share of the credit for Clintonomics. Economist Michael Mandel has written that “the impact of the policies Reagan set out in the 1980s, which slowly worked their way through the economy, helped lay the groundwork for the Information Revolution of the 1990s.” And a Brookings study recently noted that “income progress was broad and robust through the Reagan and Clinton years.”
Fourth, Bill Clinton had policies — NAFTA, welfare reform, financial deregulation, capital gains tax cuts, the idea of investing Social Security surpluses into the stock market — that might seem a misfit for the Obama-era Democratic Party.
Now I don’t know if any of that stuff works as anti-Hillary talking points. Don’t really care. But it does provide a more nuanced view of Bill Clinton’s economic record, a record sure to be discussed and examined as the 2016 presidential campaign heats up.
View related content: Pethokoukis
On Monday, Jim Pethokoukis appeared on CNBC to discuss recent statements by Hillary Clinton, the middle class, and the income gap. Watch the video below to hear his thoughts on how Clinton will approach income inequality.
View related content: Pethokoukis
I sometimes ask people how far back in time they would be willing to live. Most certainly don’t want to live before anesthesia. Pre-telephone and pre-television also seem to be no-go zones for most people, too. Along the same lines, the WaPo’s Matt O’Brien offers this thought experiment as way of framing the issue of middle-class income stagnation:
Adjusted for inflation, would you rather make $50,000 in today’s world or $100,000 in 1980’s? In other words, is an extra $50,000 enough to get you to give up the internet and TV and computer that you have now? The answer isn’t obvious. And if $100,000 isn’t enough, what would be? $200,000? More? This might be the best way to get a sense of how much better technology has made our lives—not to mention the fact that people are living longer—the past 35 years, but the problem is it’s particular to you and your tastes. It’s not easy to generalize.
This gets at the economic issue of consumer surplus, or the “monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay.” A recent Goldman Sachs note made mention of this in relation to whether the rise of the digital economy means we are mismeasuring GDP:
How important is this issue for GDP measurement? Hard evidence is again hard to come by, but Erik Brynjolfsson and Joo Hee Oh estimated in 2012 that the growth in time spent on free internet sites between 2007 and 2011 created incremental consumer surplus worth ¾% of GDP each year. Although the uncertainty around these types of estimates is obviously very large, as the authors acknowledge, we do think it is plausible that increased new products bias could be holding down the measured real GDP growth rate by a meaningful amount.
I think the consumer surplus from the Internet is quite high. Is an additional $50,000 enough for me? Given how much the IT revolution helps me do my job and live a more intellectually stimulating life — and a more convenient life — I don’t think so. Then again, my own answer to that first question, “Last week.”
During her presidential announcement speech yesterday, Hillary Clinton offered this interesting explanation for the Financial Crisis:
We’re still working our way back from a crisis that happened because time-tested values were replaced by false promises. Instead of an economy built by every American, for every American, we were told that if we let those at the top pay lower taxes and bend the rules, their success would trickle down to everyone else.
What happened? Well, instead of a balanced budget with surpluses that could have eventually paid off our national debt, the Republicans twice cut taxes for the wealthiest, borrowed money from other countries to pay for two wars, and family incomes dropped. You know where we ended up.
Tax cuts? Inequality? Budget deficits? I have heard this story before. It is highly unpersuasive, as I argued in a 2012 blog post with one of my favorite ever headlines, “Obama didn’t end the Great Recession that Bush didn’t cause.” Don’t believe me? Trying reading any of the opinions in the Financial Crisis Inquiry Commission report. They seems to blame banks and regulators and government agencies and credit raters and so forth. Interestingly, here is one of Time magazine’s “25 people to blame for the financial crisis”:
Bill Clinton. President Clinton’s tenure was characterized by economic prosperity and financial deregulation, which in many ways set the stage for the excesses of recent years. Among his biggest strokes of free-wheeling capitalism was the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act, a cornerstone of Depression-era regulation. He also signed the Commodity Futures Modernization Act, which exempted credit-default swaps from regulation. In 1995 Clinton loosened housing rules by rewriting the Community Reinvestment Act, which put added pressure on banks to lend in low-income neighborhoods. It is the subject of heated political and scholarly debate whether any of these moves are to blame for our troubles, but they certainly played a role in creating a permissive lending environment.
A decade after U.S. home sales peaked, 15.4 percent of owners in the first quarter owed more on their mortgages than their properties were worth, according to a report Friday by Zillow Inc. While that’s down from a high of 31.4 percent in 2012, it’s still alarmingly above the 1 or 2 percent that marks a healthy market, said Humphries, the chief economist at the Seattle-based real-estate data provider.
Worse yet: The pace of healing is losing steam. The blotch stains the economy by restraining the housing recovery and by preventing the job market from becoming even more vigorous. It also will probably exacerbate wealth inequality for years to come as homes valued in the bottom third of the market are more likely to be underwater.
Right. Six years into the Not-So-Great Recovery and we are still feeling the effects of the downturn. Recall this recently from Ken Rogoff:
However, there has been far too much focus on orthodox policy responses and not enough on heterodox responses that might have been better suited to a crisis greatly amplified by financial market breakdown. In particular, policymakers should have more vigorously pursued debt write-downs (e.g. subprime debt in the US and periphery-country debt in Europe), accompanied by bank restructuring and recapitalisation. In addition, central banks were too rigid with their inflation target regimes. Had they been more aggressive in getting out in front of the Crisis by pushing for temporarily elevated rates, the problem of the zero lower bound might have been avoided. In general, failure to more seriously consider the kinds of heterodox responses that emerging markets have long employed is partly a reflection of an inadequate understanding of how advanced countries have dealt with banking and debt crises in the past.
More on alternative policy in this post: “Was not massively helping underwater homeowners a massive mistake?”
Is there really a Great Stagnation? The problem of measuring economic growth in America’s digital economy
Last month, Goldman Sachs economists Jan Hatzius and Kris Dawsey put out a research report arguing US government statistics understate GDP growth because they understate productivity growth. Over the past five years, productivity growth has averaged 0.6% annually vs. 2.6% over the prior 15 years. Here’s the gist of Goldman’s argument in “Productivity Paradox v2.0″:
— Measured productivity growth has slowed sharply in recent years, and we have reduced our working assumption for the underlying trend to 1½%. This is the same sluggish rate that prevailed from 1973 to 1995 and stands well below the long-term US average of 2¼%. The proximate cause of the slowdown is a slump in the measured contribution from information technology.
— But is the weakness for real? We have our doubts. Profit margins have risen to record levels, inflation has mostly surprised on the downside, overall equity prices have surged, and technology stocks have performed even better than the broader market. None of this feels like a major IT-led productivity slowdown.
— One potential explanation that reconciles these observations is that structural changes in the US economy may have resulted in a statistical understatement of real GDP growth. There are several possible areas of concern, but the rapid growth of software and digital content—where quality-adjusted prices and real output are much harder to measure than in most other sectors—seems particularly important.
— Specifically, we see reasons to believe that the well-known upward biases in the inflation statistics related to quality changes and the introduction of new products are particularly severe for software and digital content. Quantifying the effects is difficult, but it is not unreasonable to think that they could offset a substantial portion of the measured productivity slowdown.
— Our analysis has three practical implications. First, confident pronouncements that the standard of living is growing much more slowly than in the past should be taken with a grain of salt. Second, given the uncertainty around GDP, it is better to focus on other indicators—especially employment—to gauge the cumulative progress of the recovery and the remaining amount of slack. And third, true inflation is probably even lower than measured inflation, reinforcing the case for continued accommodative monetary policy.
Yesterday, JPMorgan economist Michael Feroli and Jesse Edgerton offered a direct counter in the cleverly titled “Do androids dream of electric growth?”:
— Slowing economic growth has prompted speculation that the data aren’t capturing the digital economy
— For this explanation to work one needs to demonstrate that measurement issues are getting worse over time
— There is evidence that there are measurement issues, but little evidence thus far that they are getting worse
— The conjecture that the recent growth slowdown is due to mismeasurement has little empirical support
So two big issues for Goldman. First, calculating the “overall amount of “consumer surplus” for new products is hard. This is an especially troublesome measurement when dealing with “free” digital content. Hatzius and Dawsey: “How important is this issue for GDP measurement? Hard evidence is again hard to come by, but Erik Brynjolfsson and Joo Hee Oh estimated in 2012 that the growth in time spent on free internet sites between 2007 and 2011 created incremental consumer surplus worth ¾% of GDP each year. Although the uncertainty around these types of estimates is obviously very large, as the authors acknowledge, we do think it is plausible that increased new products bias could be holding down the measured real GDP growth rate by a meaningful amount.”
Second, inflation statisticians are better at doing quality-adjustments for computer hardware rather than software. Measured prices of the latter have declined only fraction of the former. [See chart below.] As Hatzius and Dawsey memorably put it, “How much better is Grand Theft Auto V than Grand Theft Auto IV?” Tough to know.
JPMorgan sees things differently. First, while Feroli and Edgerton concede we may be chronically undermeasuring productivity, they are skeptical that bias is getting worse. Cellphones, email, and Internet existed before the Great Recession. The digital economy is not new, but the productivity slowdown is. And do today’s technological advances present “thornier challenges for price measurement than did the introduction of televisions, air conditioning, washer/dryers, electric guitars, dishwashers, microwaves, VCRs, game consoles, and all the rest of the decades-long parade of once-amazing new products that have continually improved living standards”?
Second, why focus on how, say, Uber is an undercounted quality improvement but ignore opposite examples like how airline seats are smaller and delayed departures have increased? Feroli and Edgerton: “Quality-adjusted airfares have likely been increasing much faster than the reported data. Other examples abound. We should be cautious about cherry-picked arguments.
Third, the productivity slowdown is also seen in industries that are eaier to measure, such a manufacturing.
So who is right? I think the honest answer is that we aren’t really certain, though I do know that Goldman’s conclusion syncs with the innovation and productivity research of AEI’s Stephen Oliner. More research is needed and, thankfully, is on the way. Policymakers should hope that Goldman is right but act as if JPMorgan is right and pursue needed reforms in areas such as education, immigration, entrepreneurship, and basic research.
View related content: Pethokoukis