James Pethokoukis

Politics and policy from inside Washington

Obama and America’s 20-year bust

March 31, 2010

It is an alarming, jaw-dropping conclusion. The U.S. standard of living, says superstar Northwestern University economist Robert Gordon in a new paper, is about to experience its slowest growth “over any two-decade interval recorded since the inauguration of George Washington.” That’s right, get ready for twenty years of major-league economic suckage. It is an event that would change America’s material expectations, self-identity and political landscape.  Change in the worst way.

Now it’s not so much that the Great Recession will morph into the Long Recession. More like ease into the Great Stagnation. As Gordon calculates it, the economy will average only 2.4 percent annual real GDP growth over that span vs. 3 percent or so during the previous 20 years. On a per capita basis, the economy will grow at just a 1.5 percent average annual rate vs. 2.17 percent between 1929 and 2007.

That might not seem like much of a difference, but it really is. Over time, the power of compounding would create a huge growth gap measured in the trillions of dollars. To look at it another way, assume you had an annual salary of $100,000. If you received a 1.5 percent raise each year, you would be making $134,000 after 20 years, $153,000 after 40 years. But a 2.17 annual raise would boost your income to $153,000 after 20 years and $236,000 after 40 years.

For Gordon, the culprit is weaker productivity. Productivity, economists like to say, isn’t everything — but in the long run it is almost everything. A nation’s GDP growth is little more than a derivative of how many workers the nation has and how much they produce. And if Gordon  is correct, U.S. productivity is about to weaken. He forecasts that over the next two decades, the metric will grow at just a 1.7 percent annual rate. From 1996-2007, economy-wide productivity averaged just over 2 percent with GDP growing at 3.1 percent.

Gordon’s argument is simple: The productivity surge starting in the 1990s was driven primarily by the Internet, though drastic corporate cost-cutting in the early 2000s helped, too. Going forward, though, Gordon thinks the IT revolution will be marked by diminishing returns. He concludes, for instance, that most of the product innovations since 2000, like flat screen TVs and iPods, have been directed at consumer enjoyment rather than business productivity. (Also not helping are a more protectionist trade policy and a tax code where the penalties on savings and investment are about to skyrocket with rates soaring 60 percent on capital gains and 200 percent on dividends.)

All this dovetails nicely with research showing financial crises are followed by negative, long-term side-effects such as slow economic growth and higher interest rates. Lots of debt, too. Indeed, researchers Carmen Reinhart and Kenneth Rogoff find advanced economies with debt-to-GDP ratios above 90 percent grow more slowly than less-indebted ones. (Japan is the classic example.) America is on track to hit that level in 2020, according to the Congressional Budget Office.

But maybe Gordon is wrong. Productivity has been surprisingly robust during the downturn, helping the overall economy (though not the labor market) weather the storm better than most expected. Maybe nanotechnology or genetic engineering will be the next Internet and ignite further creative destruction. Yet even if Gordon is correct, Americans still control their own economic destiny.

Since the 2008 election, American economic policy has been about wealth preservation (keeping the economy from sliding into a depression) and wealth redistribution (healthcare reform.) Wealth creation? Not so much.  That needs to change. Washington needs to focus on growing the economy and competing with the rest of the G20 nations, including the other member of the G2, China. Every policy — from education to trade to the tax code — needs to be seen through that lens.

America faced a similar turning point a generation ago. During the Jimmy Carter years, the Malthusian, Limits to Growth crowd argued that natural-resource constraints meant Americans would have to lower their economic expectations and accept economic stagnation — or worse. Carter more or less accepted an end to American Exceptionalism, but the 1980 presidential election showed few of his countrymen did. They chose growth economics and the economy grew.

Now they face another choice. Preserve wealth, redistribute wealth or create wealth.  Hopefully, President Barack Obama will choose door #3. Investing more in basic research (not just healthcare) would be a start, as would slashing the corporate tax rate. A new consumption tax would be better for growth, but only if it replaced the current wage and investment income taxes. Real entitlement reform would help avoid the Reinhart-Rogoff scenario. The choices made during the next few years could the difference between America in Decline or the American (21st) Century.

Comments

Come on November!

Posted by LoachDriver | Report as abusive
 

Interesting definitely, but we’ll see how the 20 year average ultimately plays out. I am extremely hard pressed to believe the argument that productivity will see diminishing returns – an entire generation which is far more productive at the productivity-enhancing technology of the 90s & 00s is entering the workforce. These people will be capable of – and expected to be capable of – far more than the older colleagues in the same role. And even beyond this specific generational moment of young and wired in the workplace, to say that most of the productivity gains for our technology will bring us diminishing returns? That doesn’t pass the smell test – it is effectively to pronounce innovation dead (yes not exactly but effectively). Thinking about gross inefficiencies in my company alone (major global law firm) I pretty much refuse to believe the biggest increases in productivity are behind us – that just makes no sense, from a practical point of view. Maybe the leafy view from Evanston is implicating the good professors prediction.

Posted by g50 | Report as abusive
 

Russ in NC,

Demographics may be destiny, but we still outnumber all these other groups combined and if we get our kind into public office perhaps the brakes can be put on runaway immigration.

Posted by LoachDriver | Report as abusive
 

My biggest concern is the class warfare that is being echoed from our current administration. I am the CEO of a very successful computer company. I am tired of uneducated people telling me how companies like mine are the root cause of the current economic situation. I fear my safety……is this America? In the near future, am I any more secure to be a successful businessman or an unemployed unskilled worker? If the economy continues it’s down word slide I hate to say I’ll be the scape goat. What do I do? Where do I go? These are scary times.

Posted by Tom | Report as abusive
 

No trend will last for 40 years. World War III will change everything, and in very unpredictable ways.

Posted by Andrew P | Report as abusive
 

This state of affairs are known to many Americans and in general public.
Because of economic slow down, no clear cut policy on major issues,last two years banks financial crisis, not much appreciated exports from America, more expenditure on Iraq/Afghans areas, some misconception on Mr.Obama!s new health care proposals made his downward rating on his policies,actions etc.,from Americans.
Mr.Obama wants to do more welfare measures to native Americans and to others as early as possible.
Those who attracts by his or speeches may be short lived.
America was in very pretty positions and enjoying their wealth for many centuries.
Now, other nations had started moving towards forward journey and getting favorable results from now and then.
If government wants to build more cash reserve, more expenditure on running and sustaining economic and social growth, creating more infrastructure, then, our college economics speaks in real terms.
There is no other ways, only to get more revenue by regulations, more and more exported industries formation,more productive work, increase their standard of income,then, some taxes to be levied and can be collected from many high,upper classes.
Still,some years to go and to find what happens on American soil by Mr.Obama and his team.
These findings may be a search type for any corrections and bring his ratings to upwards.,

Posted by mdspatsy | Report as abusive
 

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