James Pethokoukis

Politics and policy from inside Washington

5% or bust: more on America’s growth potential

June 17, 2011

So typical. The WaPo’s Ezra Klein quotes a bunch of people saying that there is no way, no how the economy can grow at 5 percent for a decade,  the “aspirational” economic goal of Tim Pawlenty.

Hey, I can quote people, too! Like economist John Taylor of Stanford:

First, look at employment growth. Given the dismal jobs situation, that’s the highest priority. Currently the percentage of the working-age population (age 16 and over) that is actually working is very low at 58.4 percent. In the year 2000 it reached 64.7 percent, so that is at least a feasible number. Raising the employment-to-population ratio to 64.7 means an employment increase of 10.8 percent (64.7-58.4/58.4 = .108) or about 1 percent per year over 10 years, even without any growth of the population. Adding in about 1 percent for population growth (from Census projections), gives employment growth of 2 percent per year.

Now consider productivity growth. Since the productivity resurgence began around 1996, productivity growth in the United States has averaged 2.7 percent according to the Bureau of Labor Statistics. So numbers in that range are not pie in the sky. As Harvard economist Dale Jorgenson and his colleagues have shown, the IT revolution is part of the explanation for the productivity growth, and, if not stifled, is likely to continue, as is pretty clear to me as I sit a few hundred yards from Facebook and other high-tech firms.

Now if we add the 2.7 percent productivity growth to the 2 percent employment growth, we get 4.7 percent economic growth, which is within reaching distance of—or simply rounds up to—the 5 percent target set by Governor Pawlenty. Thus, five percent growth is a good goal to aspire to, whereas 3 or 4 percent would be too little and 6 or 7 percent too much

Is Taylor correct? Well, Don Marron of the Tax Policy Center (and formerly of the Bush WH) puts it this way:

Taylor’s scenario thus assumes that everything breaks right for the U.S. economy for a full decade, with remarkable job growth and remarkable productivity growth in the economy as a whole. Not impossible but, unfortunately, not likely either.

Marron thinks Taylor’s population and productivity numbers are fine. But he does have three problems:

1) Taylor uses a very optimistic assumption about how much employment growth can exceed population growth. Today, about 58% of the working age population has a job. That woefully low level ought to rise as the Great Recession recedes. Taylor assumes that we can boost that ratio back to its 2000 level of almost 65%. But 2000 was the tail end of a technology boom that lifted America’s employment-to-population ratio to record heights. Since then, the working population has aged, so the employment-to-population ratio will be persistently lower even in good times. CEA thus forecasts that labor force changes will trim about 0.3% annually from potential growth in coming years. Getting the employment-to-population ratio back up to 65% thus won’t happen unless we have an even bigger boom than the late 1990s delivered.

2) Taylor assumes that workers will keep working the same number of hours that they do today. That sounds innocuous except for one thing: average hours have been declining. CEA estimates that trimmed 0.3% per year from potential economic growth from 1958 to 2007 and will trim another 0.1% per year from 2010 through 2021.

3) Taylor assumes that the rest of the economy will enjoy the same productivity growth as the nonfarm business sector. In reality, the other parts of the economy – most notably government – are lagging behind. CEA estimates that slower productivity growth outside the nonfarm business sector trimmed 0.2% from potential economic growth from 1958 to 2007 and sees an even bigger bite, 0.4% annually, in the coming decade.

I still like the 5 percent target, even though I think 3.5 -4.0 percent is more realistic.  And Pawlenty’s basic path for getting there — tax policy that rewards saving, reducing regulation and cutting the share of our economy gobbled up by government — is sound as far as it goes.  I would also like to see more on immigration and education policy, as well approaching  basic research and infrastructure spending in a market-friendly way.

 

 

 

Comments

Education can add billions to our economy as it would stop giving company excuses for off-shoring jobs. The current trend is to actually bring the jobs back, but education would at least allow Americans to off-shore themselves to find work if they have to (I work for a japanese company in China until jobs come back to the US.). Infrastructure is a must as the US is decaying in this area. The Obama-haters need to realize this simple fact. But it should be done efficiently, but not the chinese style of efficiency which means fast and corrupt. The biggest thing that will keep our economy growing is to reduce imports and increase exports. The US needs to change its export laws to allow more high tech exports, because most of those restrictions are just laughable. Of course we have to keep restrictions on certain military equipment, but come one. Also, we need to reduce the oil imports, which account for the largest chunk of US imports. Alternative fuels, energy efficient technology, and domestic oil production is the key. One last thing; buy american. I live in China and still have the opportunity to buy American goods at local import stores. Those who complain about the US economy but still buy imports are missing the big picture.

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