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While the IMF pours cold water on the Trump administration’s plans of 3% growth, JP Morgan provides a look at how one state is already there:
The California economy got hit harder than the rest of the country in the last recession. After a sluggish initial recovery, the nation’s largest state hit its stride by the end of 2011 and in the ensuing five years has grown at a 3.5% annual rate—a respectable pace even by pre-secular stagnation standards. Meanwhile, the rest of the country grew at a pokier 1.7% rate over that same period (Figure 1):
This greater GDP growth is not merely a result of faster population growth, but rather faster GDP growth per capita:
How did this happen? The answer probably won’t surprise you.
The first clue comes from looking at the growth in the state’s metro areas (Figure 4). Among the four largest agglomerations, the San Jose area—home to Silicon Valley—has easily outperformed the other large metro areas in recent years. Regional GDP in this metro area has galloped ahead at over a 6% annual pace in the five years ending in 2015 (the most recent reading for local area GDP). … The broad industry group the state is most specialized in is information. While this includes southern California’s specialty—motion picture and sound recording industries—it also includes northern California’s areas of expertise: software and the internet. This tech-heavy skew of the California economy also manifests itself in several measures associated with growth and economic dynamism where the state punches well above its weight. For example, although California accounts for 14% of the country’s GDP, it is where 29% of business R&D is spent, more than the next six largest states combined. Overseas investors also have taken notice: 29% of inbound foreign direct investment (FDI) in the most recent data was destined for California. And in the year ending 3Q16 (the most recent data), 33% of the country’s net new business formation occurred in California.
Like most economic forecasters, the International Monetary Fund never saw Trumponomics as capable of delivering superfast growth ASAP. So now that massive tax cuts and infrastructure spending are looking more unlikely, the IMF is only modestly reducing its near-term outlook. As the Financial Times notes:
Following slow progress by the White House and Capitol Hill on long-mooted tax reforms, the fund on Tuesday lowered its prediction for gross domestic product growth this year to 2.1 percent, down from an earlier forecast of 2.3 percent. The fund reduced its growth outlook for 2018 to 2.1 per cent from 2.5 percent.
What I found particularly interesting in the IMF report was its brief explanation (reflected in the above chart) about the difficulty of sharply raising GDP growth in an advanced economy like America’s:
The U.S. is effectively at full employment. For policy changes to be successful in achieving sustained, higher growth they would need to raise the U.S. potential growth path. The international experience and U.S. history would suggest that a sustained acceleration in annual growth of more than 1 percentage points, as projected by the administration, is unlikely. Indeed, since the 1980s there are only a few identified cases among the advanced economies where this has happened. These episodes mostly took place in the mid to late 1990s against a backdrop of strong global demand and many of them were associated with recoveries from recessions. The U.S. itself experienced one comparable growth acceleration as it recovered from the deep recession of the early 1980s. However, this event occurred during a period of favorable demographics, rising labor force participation, a significant expansion of the federal fiscal deficit, and an acceleration in trading partner growth. These tailwinds are unlikely to recur today.
A tough task, perhaps, but maybe not impossible.
With increasingly populist figures gaining traction across the world (even winning or nearly winning major elections), it seems as if the values of Western liberalism are on the decline. But are these leaders and their policies the direct cause of populism, or rather a manifestation of years of brewing anxiety? This week Ed Luce, the Washington columnist for the Financial Times, joined me to discuss this and his recent book, “The Retreat of Western Liberalism.”
PETHOKOUKIS: My guest today is Edward Luce, the Washington columnist for the Financial Times, who has a new book out: “The Retreat of Western Liberalism.” Ed, welcome to the podcast.
Great to be here, Jim.
We’re going to start at the very beginning — I mean, really the beginning — the title. To be clear about our terms, we’re talking about the retreat of, what, democratic, market capitalism. Is that what you mean by liberalism?
With increasingly populist figures gaining traction across the world (even winning or nearly winning major elections), it seems as if the values of Western liberalism are on the decline. This week Ed Luce, the Washington columnist for the Financial Times, joined me to discuss this and his recent book, “The Retreat of Western Liberalism.”
PETHOKOUKIS: What do you mean by ‘liberalism?’
Western liberalism — it’s not the American definition of liberal. So I want to make that clear up front. Liberalism in the larger sense than purely democracy is the political system that grew out of the Western Enlightenment, and evolved into what we now know as liberal democracy. So I’m talking about the retreat of the broad model of governance that we associate with the modern West.
What is your evidence that it is in retreat?
The business and consumer implications of the $14 billion Amazon-Whole Foods deal are myriad, both short term (”the boring U.S. grocery business is about to become much more interesting“) and long term (“the decision by Amazon and Walmart to compete for my grocery business … are tiny battles in a war to dominate a changing global economy“).
But there is also a political implication that goes beyond politics. As soon as I heard of the acquisition, I thought of some of Candidate Trump’s comments about Amazon, such as these to Fox News:
This [Washington Post] is owned as a toy by Jeff Bezos, who controls Amazon. Amazon is getting away with murder tax-wise. He’s using the Washington Post for power so that the politicians in Washington don’t tax Amazon like they should be taxed. He’s using the Washington Post … for political purposes to save Amazon in terms of taxes and in terms of antitrust.
He thinks I’ll go after him for antitrust. Because he’s got a huge antitrust problem because he’s controlling so much, Amazon is controlling so much of what they are doing.
Now as it turns out, there is some evidence that “greater political pressure does cause the FTC to challenge more mergers.” Yet I have talked to people who think Trump’s previous comments mean the FTC would be less likely to take action. (And by the way, neither the FTC — which is the key one here — nor the Justice Department’s antitrust division has a permanent boss right now, according to Bloomberg.) Let’s see if the POTUS unleashes a tweetstorm against Amazon. But there could be a bipartisan critique. This from Barry Lynn of left-leaning New America:
Amazon announced today that it wants to buy grocery chain Whole Foods for $13.7 billion in cash. If approved by regulators, the deal would worsen the already severe damage that Amazon is doing to America’s competitive, open market system.
This private corporation already dominates every corner of online commerce, and uses its power to set terms and prices for many of the most important products Americans buy or sell to one another. Now Amazon is exploiting that advantage to take over physical retail.
But this is just part of America’s Amazon Problem. The corporation wields vastly too much power over America’s markets for books and music, and is fast consolidating control over other key flows of information and ideas.
The digital revolution was supposed to make Americans more free. But two decades of bad antitrust enforcement allowed a few giants to consolidate control over whole realms of commerce and communications. It is way past time for the American people to use our government to address the overwhelming concentration of power in the hands of Amazon, and to fully realize the promise of the digital revolution.
Government antitrust enforcers should block this merger. They should also begin a broader investigation into every other anti-competitive practice by Amazon. Congress too must accept its responsibility to address Amazon’s big and growing threat to America’s competitive, open market system, and to the free flow of information and ideas.
This alarmist view of Big Tech — including Facebook, Apple, Alphabet/Google, Microsoft — seems to be growing more common on the left, a view that its huge concentrations of wealth and data mean the platform companies have captured the economy. Check out this tweet from former Obama economist Betsy Stevenson: “Amazon is getting an increasing share of household budgets – they may succeed in their strategy of becoming our national monopolist.”
Yesterday an Axios piece on this issue included this bank analyst quote: “It could ultimately lead to populist calls for redistribution of the increasingly concentrated wealth of Silicon Valley as the gap between tech capital & human capital grows ever-wider.”(Clearly Democrats have brewing political problem here — and the GOP an opportunity — given that Silicon Valley is a big Dem supporter.) Many progressives are already there, combining a call for more redistribution with increased regulation and possible antitrust action toward Big Tech. As WSJ financial editor Dennis Berman joke tweeted:
What will Amazon look like when it is broken apart in 2025?
What am I missing?
— Dennis K. Berman (@dkberman) June 16, 2017
As for me, I will stick with this take of mine from yesterday where I express skepticism that Big Tech is a threat to the democracy and the economy of the United States.
France’s new president, Emmanuel Macron, wants to create a Silicon Valley in his country. After the Trump administration dumped the Paris climate agreement, Macron filmed a video in which he called upon “all scientists, engineers, entrepreneurs, responsible citizens who were disappointed by the decision of the president of the United States, I want to say that they will find in France a second homeland.”
Now let me digress: Over lunch the other day, a trusted AEI colleague told me that Arizona is known for its strong youth hockey. This surprised me. No one is going to mistake a state whose official plant is the saguaro cactus for, you know, Minnesota. But it turns out that many NHL players retire to Arizona. This provides the state with an abundance of coaching talent and interest in the sport. So there was no grand plan to turn Arizona into a youth hockey mecca. It happened organically. More an accident of weather than anything else.
Upon hearing this, I was immediately reminded of the story of how Paul Allen and Big Gates decided to relocate Microsoft from Albuquerque to Seattle. As economist Enrico Moretti writes in his outstanding book, “The Geography of Jobs,”
The move was transformative for Seattle. In 1980, Moretti notes, college graduates in Seattle were making just $4,200 more than those in Albuquerque vs. $14,000 more today. One is considered a tech hub—Amazon is headquartered there—one is not. And as Moretti has noted, “If you look at the history of America’s great innovation hubs, they haven’t found one that was directly, explicitly engineered by an explicit policy on the part of the government. It’s really hard.” Or as economist Ernie Tedeschi tweets, “If Macron wants to create another Silicon Valley, he should get in line. We can’t even make another one here in the US.”
Along the same lines, Aaron Renn writes on the “superstar gap” over at New Geography:
The best coders are 10x as productive as the merely very good coder. The top entrepreneurs are probably 100x or or more. The presence of superstars, along with some amount of good fortune, can transform the economy of a city or region. Jeff Bezos is a superstar. Mark Zuckerberg is a superstar. Michael Bloomberg is a superstar. … And it’s not just that superstars create things, they act like a magnet attracting others. As economic development consultant Kevin Hively once told me, “When you’re the best in the world, people beat a path to your door.” To see this in action, just look at Carnegie Mellon University in Pittsburgh. CMU has the #1 ranked computer science program in the country. And companies like Google (600 employees), Uber (500 employees), Apple (500 employees), Intel, and Amazon been drawn there and set up shops around it. Ford is investing a billion dollars into autonomous vehicle ventures there. And GM also has a presence.
So based on all that, Macron’s strategy—even if it really is just a bit of trolling—may be as productive and successful as any other. Getting superstars to relocate is a sort of strategy (and taxes may matter at the margins). And Renn had a bit of policy advice for the American Midwest:
For example, one thing I don’t see in most discussion of Chicago is its lack of superstar talent. Chicago is very good but not the best in a lot of things. Where they do have arguably world beating talent, such as in their culinary industry, they shine. (I know people in New York who happily admit Chicago has better restaurants).
If I were that city, I’d be looking to see how to create a world’s best talent pool in additional particular high impact industries. Maybe the state should consider some radical type action, such as relocating U of I’s entire computer science and select engineering programs to Chicago as part of UI Labs, and putting serious muscle behind getting at least some critical subspecialities with high commerical potential to be clear #1’s in the world. … Regardless, this lack of superstar/number one type talent in the interior is a big handicap in the world we live in now. For example, just look back at a 2010 analysis Carl Wohlt did of where the people on Fast Company’s “100 Most Creative People in Business” list lived. Only six in the Midwest and seven in the South vs. 35 in the West and 32 in the Northeast (with 20 international). This isn’t a scientific survey but illustrates the scope of the problem.
Cities and states need to take a more finer grained view of talent, and understand the criticality of having at least some of the absolute best talent to kicking a region’s knowledge economy into high gear. Too many places have a superstar gap.
If I were to list America’s big problems here in 2017, I’m not sure it would occur to me note the huge success of Big Tech—Amazon, Apple, Facebook, Alphabet/Google, Microsoft—as one of them.
But I know there are those who would. As Axios reporter Kim Hart points out in a longish piece today, there are political activists, academics,m and economists who are deeply worried that such huge concentrations of wealth and data mean the platform companies “have captured the economy.”
And where might this concern about the techopoly lead? Hart includes an ominous quote from a bank analyst: “It could ultimately lead to populist calls for redistribution of the increasingly concentrated wealth of Silicon Valley as the gap between tech capital & human capital grows ever-wider.”
It kind of already is happening. Recall that Elizabeth Warren has cited Amazon, Apple, and Google as examples of concentrated corporate power, comparing them to Wall Street’s “too big to fail” megabanks. And some progressive definitely want to break up Big Tech.
Coming to the issue fresh, I might find the piece—which gives pros and cons—making a slightly stronger argument that “something needs to be done,” such as greater regulation or antitrust action. Not only does it include plenty of scare stats (“The market cap of tech giants is already greater than the GDP of large U.S. cities”), but there is this compelling pro-growth argument from economist Luigi Zingales:
People don’t fully appreciate that the reason we have Google and Facebook today is because there was an antitrust enforcement action against Microsoft that slowed down the ability of Microsoft to monopolize the internet, the browsers, the data, search, and so on. Today’s monopolies are yesterday’s startups. In a good system, this keeps changing.
But I would at this point still take the other side of the trade. From my The Week column last year, which I think still holds up:
Google’s top economist Hal Varian had an op-ed in the Financial Times in which he made the case that tech giants are nothing like the robber baron monopolists of old. Rather, they are constantly subject to “disruption” while continuing to innovate and bring cool new products and services to consumers and small businesses alike. … It wasn’t so long ago that MySpace was the largest and most dominant social networking site. Fortune magazine once declared Yahoo the winner of the “search engine wars.” The founders and executives at top tech firms hardly think their positions are forever secure. Will smart bots threaten Google’s core search business? Will the fast-growing Chinese market undermine the iPhone in Asia? Look out Facebook, here comes Snapchat! … [One should also point out] all the ways — in addition, perhaps, to an anti-trust rethink on the right — to make the economy more competitive, including reforming occupational licensing laws, less stringent patent and copyright protection, and reviewing tax and regulatory rules that benefit incumbents over startups.
Regular AEIdeas readers have almost certainly seen some version of this chart showing a steady decline in US entrepreneurship:
Now, as discouraging as that chart is — and the lack of creative disruption it represents — things would be even worse if we saw a corresponding rise in unproductive entrepreneurship. In a new HBR piece, Ian Hathaway and Robert Litan write about what that means, keying in on the work of economist William Baumol:
A sizable body of research establishes that these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the old in favor of the new, are critical for breakthrough innovations and rapid advances in productivity and standards of living.
Baumol was worried, however, by a very different sort of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to construct regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, in the process stifling competition to create advantage for their firms. Economists call this rent-seeking behavior.
Indeed, Hathaway and Litan are worried about a rise in unproductive entrepreneurship and offer a few bits of supporting evidence:
Perhaps most convincing, University of Chicago economist Simcha Barkai carefully tabulated the share of industry income distributed to labor, capital, and “profits.” (Normally, capital and profits are included together in one broad, residual “returns to shareholders” category.) He found that the share of income earned by workers has been falling, as others have pointed out, but also that the share earned by capital has, too. Indeed, both have been declining while the share of income going to “markups,” or rents, has been increasing.
To be clear, the presence of economic rents by itself doesn’t establish that there’s been an increase in unproductive entrepreneurship. For that to be true, there must be be evidence of an increase in rent-seeking — that is, concerted efforts to stifle competition by influencing the reward structure or rules of the game in a market.
James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior has been increasing. In a 2016 paper Bessen demonstrates that, since 2000, “political factors” account for a substantial part of the increase in corporate profits. This occurs through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang of the University of Illinois have found that companies that have executives with close ties to key policy makers have abnormally high stock returns.
The advanced economies have experienced more than four decades of sluggish productivity growth. Governments, it is clear by now, can do very little to influence this situation, at least in any predicable way. Improving infrastructure, supporting scientific research, and fostering education and worker training all may contribute to faster productivity growth over time, but no one can say how quickly those investments will pay off—or whether they will pay off at all.
If productivity is to soar again, it will almost certainly be the result of innovations taking root in the private sector. This is not unimaginable: developments such as artificial intelligence, virtual reality, and nanotechnology don’t seem to have done much for productivity growth so far, but it’s entirely imaginable that they will revolutionize business tomorrow. If they do, and if the resulting income growth is shared widely among workers, it would be wonderful indeed. But unless that happens, the world is likely to be stuck with an economy that is pretty ordinary
I reviewed Levinson’s recent book, “An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy,” for National Review, and his FA piece provides a succinct summary of that work. The book provides a readable and insightful walk through postwar economic history, from the Golden Age of the 1950s and 1960s to (as he sees it) the subsequent stagnation that followed. As I wrote in the NR piece, I am more optimistic than Levinson — though I don’t think we are one tax cut away from Golden Age 2.0. (Nor am I as negative about recent economic history.) So many policies in so many areas are suboptimal for innovation and productivity growth — education, healthcare, housing, regulation — that I think at least a bit of optimism is reasonable.
But I think Levinson is dead on about the importance of the private sector. In that, he echoes John Fernald of the SF Fed:
Once the economy recovers fully from the Great Recession, GDP growth is likely to be well below historical norms, plausibly in the range of 1½ to 1¾% per year. …
This forecast is consistent with productivity growth net of labor quality returning over the coming decade to its average pace from 1973–95, which is a bit faster than its pace since 2004. …
This slower pace of growth has numerous implications. For workers, it means slow growth in average wages and living standards. For businesses, it implies relatively modest growth in sales. For policymakers, it suggests a low “speed limit” for the economy and relatively modest growth in tax revenue. …
Boosting productivity growth above this modest pace will depend primarily on whether the private sector can find new and improved ways of doing business. Still, policy changes may help. For example, policies to improve education and lifelong learning can help raise labor quality and, thereby, labor productivity. Improving infrastructure can complement private activities. Finally, providing more public funding for research and development can make new innovations more likely in the future.
My watchwords here are creativity, exploration, experimentation, dynamism, churn, competition, diffusion, and, of course, disruption. More, please.
I just wanted to highlight just bit of this great Tim O’Reilly essay on automation, jobs, and Amazon:
I spoke recently with a fulfillment and logistics executive at Amazon who told me that robots have allowed the company to pack more products into its warehouses, and to speed up picking, so that it can put more products into rapid fulfillment. Amazon expects to hire another 100,000 workers in the next eighteen months, many of them in its fulfillment centers.
And that doesn’t include all the people working in actual delivery. Do you remember when the United States Post Office was seemingly on its last legs, cutting services and delivery hours? If you’re like me, you’re now getting multiple deliveries per day, and the postman might well show up in the evening, working overtime. Amazon Flex, Amazon’s peer-to-peer delivery service (akin to Lyft or Uber, but for delivery only) is apparently growing so rapidly that it may overtake Lyft as the second largest source of employment for on-demand drivers.
Nor does it include employment at the more than 100,000 small companies that use Amazon’s platform to sell and distribute their own goods. Many of these companies would have no access to the market without Amazon. (My brother is a good example. He runs a small distribution business out of a warehouse in Front Royal, VA, shipping used books, auto parts, and various imported products he thinks his customers might find interesting.)
Amazon reminds us again and again that it isn’t technology that eliminates jobs, it is the short-sighted business decisions that use technology simply to cut costs and fatten corporate profits. …
There is an enormous failure of imagination among those who think that we face a jobless future. The weavers of the 1811 Luddite rebellion, who smashed the machine looms that were threatening their livelihood, couldn’t imagine that their descendants would have more clothing than the kings and queens of Europe. Machines expanded the demand for the labor of weavers, augmented by machines, because it lowered the cost of fabric, and human creativity found new uses for that cheaper fabric, including decorating it with a constantly changing palette of color, cut, and design but also inventing entirely new kinds of uses, from surgical meshes to spacesuits.
Do read the whole thing.