James Pethokoukis

Politics and policy from inside Washington

Obama and America’s 20-year bust

Mar 31, 2010 11:51 UTC

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.

COMMENT

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

Economic guru: US faces its worst two decades in history

Mar 29, 2010 14:04 UTC

Get ready for the Long Recession.

Well, at least a long period of time where it is going to seem like the US economy is kind of sickly. That is the conclusion of productivity guru Robert Gordon in a new paper. He says US living standards now face their slowest two-decade growth rate “since the inauguration of George Washington.” More:

The statistical trend for growth in total economy [labor productivity] ranged from 2.75 percent in early 1962 down to 1.25 percent in late 1979 and recovered to 2.45 percent in 2002. Our results on productivity trends identify a problem in the interpretation of the 2008-09 recession and conclude that at present statistical trends cannot be extended past 2007.

For the longer stretch of history back to 1891, the paper provides numerous corrections to the growth of labor quality and to capital quantity and quality, leading to significant rearrangements of the growth pattern of MFP, generally lowering the unadjusted MFP growth rates during 1928-50 and raising them after 1950. Nevertheless, by far the most rapid MFP growth in U. S. history occurred in 1928-50, a phenomenon that I have previously dubbed the “one big wave.”

The paper approaches the task of forecasting 20 years into the future by extracting relevant precedents from the growth in labor productivity and in MFP over the last seven years, the last 20 years, and the last 116 years. Its conclusion is that over the next 20 years (2007-2027) growth in real potential GDP will be 2.4 percent (the same as in 2000-07), growth in total economy labor productivity will be 1.7 percent, and growth in the more familiar concept of NFPB sector labor productivity will be 2.05 percent. The implied forecast 1.50 percent growth rate of per-capita real GDP falls far short of the historical achievement of 2.17 percent between 1929 and 2007 and represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington.

Me: There is no more basic political and economic issue than a nation’s standard of living. If  Gordon is right, this will dominate US politics as another sign of American decline.

COMMENT

Or Plan B we could just throw the Democrats out of office (which even the “Greatest Generation” wouldn’t do), rip Obama’s poisoned laws out of the ground, and get our economy back to a nice happy 4.5% unemployment rate.

Posted by Joshua A. Schaeffer | Report as abusive

The cure for high unemployment

Mar 15, 2010 17:14 UTC

Gary Becker gets straight to the point:

The only real remedy for the long-term (and other) unemployed is to have the economy grow fast, as it did after the severe recession in 1982 when unemployment peaked in December of that year at 10.8%, and then fell rather rapidly. There is no magic bullet to accomplish this, but I do believe it would help a lot if the leaders in Washington did not try to radically transform various aspects of the economy while we are recovering from a serious recession, and thereby magnify the high degree of uncertainty that is typically caused by a recession. Instead, they should be concentrating on fighting the recession, and stimulating long-term economic growth.

Me: During the 1980s, the economy notched 19 quarters of 3.5 percent GDP growth or better. In the 1990s, the economy also notched 19 quarters of 3.5 percent growth or better. So far this decade before the recession? Just eight. Or look at the number of quarters of “hypergrowth”—5 percent or better. (This was JFK’s GDP goal in the 1960s, by the way.) There were 12 in the ’80s, eight in the ’90s. So far this decade? Just a single quarter, the third quarter of 2003.

COMMENT

The high unemployment situation will not change.The jobs lost in manufacturing is the main cause of ub-nemployment and recession.
There is no sector which will replace manufacturing jobs.The West and America are blinded by cheap imports and Free Market. China and India are growing at tremendous rate and in another year they will acquire many sucessful Companies . Still time to wake up and encourage consumer goods manufacturing.Scrap minmum wage and lets compete.Make our own goods for our own benefit .we will all be happy working again

Posted by I A | Report as abusive

So-so growth for 2010?

Jan 29, 2010 15:26 UTC

That is how IHS Global calls it:

The fourth-quarter GDP surge was produced by a sharp turn in the inventory cycle. Firms still cut inventories in the fourth quarter, but much less severely than in the third. That led to increased production, which boosted GDP. Final sales growth, a better guide to the underlying path of the economy, was much more sedate, at 2.2%, but that was still an improvement on the third quarter’s 1.5% pace.

The best news in final sales was on exports and business spending. Exports surged 18.1%, their second strong increase in a row. And there was a 13.3% increase in business spending on equipment and software (two-fifths of which came from computers). The improving trend in capital goods orders suggests more gains in equipment spending ahead. If firms are feeling confident enough to raise their equipment spending, they’re probably confident enough to start hiring again. That will support consumer spending, which showed a moderate 2.0% gain in the fourth quarter.

The weakest spot was business structures spending, down sharply again as the commercial real estate crisis took its toll.

We must be careful in drawing implications for the future from today’s release. There’s more help to come from the inventory cycle, since inventories were still falling in Q4. But we won’t see a boost as big as 3.4 percentage points again. And we’re doubtful that foreign trade can continue to be a plus for growth, as we expect imports to rebound.

The Q4 GDP surge doesn’t change the view that growth is likely to be subdued by historical standards, in the 2.5-3.0% region for 2010.

COMMENT

1. the economy turns around when enough businesses reduce enough costs to become profitable again
2. the GDP includes government spending, and Obama bucks have flooded the economy. So no surprise GDP went up. But what will happen when the Obama bucks have to be paid back?
3. the underlying problems of a horrible economy are still there: huge debt, looming taxes, looming inflation, government interventions for the sole purpose of expanding government, a new bubble in the stock market, huge uncertainties resulting from an economically illiterate administration.

They can force the GDP up by spending borrowed money, but the economy won’t get better until the criminals in Washington are washed away.

Posted by proreason | Report as abusive

America’s challenge

Jan 22, 2010 19:10 UTC

From the great David Goldman:

When Reagan took office in 1981, the baby boomers were in their 20s and 30s, America had a 10% savings rate, the current account was in surplus, and America was the world’s largest net creditor nation. Reagan was able to cut taxes and finance an enormous budget deficit because the world’s demand for US Treasury securities was correspondingly large. In 2010, the baby boomers are in their 50s and 60s, America has saved nothing for a decade, the current account remains in severe deficit and the world is choking on the existing supply of Treasury securities. Cutting taxes to stimulate the economy is not as simple this time round.

Professor Reuven Brenner and I argued in the December 2009 issue of First Things that fundamental changes in American economic policy are required to emerge from the Great Recession. We proposed that the United States fix the dollar to the Chinese yuan and other currencies in order to re-orient trade flows to the developing world. We added, “We have been borrowing in order to consume; we need now to save in order to invest. We need to shift the tax burden, moving it away from savings and investment and toward consumption. We should replace individual and corporate income taxes with consumption-based taxes.”

COMMENT

Beware of unintended consequences.

Some of the perpetrators of the Loans-to-deadbeats Ponzi scheme were just as well inteded as you two gentlemen are.

Changes this massive are extremely dangerous. Always. Maybe the impact would be super-duper. But who really knows?

Better for the government just to get the hell out of the way.

Posted by proreason | Report as abusive

How does the U.S. economic recovery compare to past ones?

Jan 4, 2010 19:57 UTC

This handy chart comes courtesy of David Rosenberg of Gluskin Sheff:

recovery010410

COMMENT

Mr. Pethokukis,what is your take on your ancestoral place’s debt problems whether it is due to capitalistic or socialistic policies?Is excessive debt necessary for long term growth?

Posted by schadha100 | Report as abusive

Black swans, good and bad, for 2010

Jan 4, 2010 19:40 UTC

A classic predictions piece from economic analyst Ed Yardeni crosses my desk. First, excerpts from his bullish Black Swans (70 percent probability, he says):

1. The Old Normal trumps the New Normal. The US economic recovery is par for the course.

2. Unemployment subsides faster than expected. The unemployment rate peaked at 10.2% during November 2009; it falls to 8% by the end of 2010.

3. Consumer spending leads the recovery in 2010.

4. The federal funds rate ends the year at 1%.

5. Inflation remains subdued, with the core CPI inflation rate remaining under 2%. While most commodity prices continue to move higher, the price of oil drops to $60 a barrel on ample supplies. The dollar continues to rally in 2010.

6. Stocks-and profits-are stronger than expected. Stock markets around the world (including the US) rise to record highs by the end of 2010.

7. The federal budget deficit starts to narrow, and stress on state and local budgets starts to lift, as a result of better-than-expected economic growth

8. The Obama administration turns more centrist after Congress passes a token health reform bill that alienates the left wing of the Democratic Party. Nevertheless, the Democrats lose their majorities in both chambers of Congress in November.

9. The Iranian government falls and is replaced by a more democratic regime.

10. The Bush tax cuts are extended, following the congressional elections and before year-end. (Fairy tales can come true and usually have happy endings.)

Now his bearish Black Swans (30 percent probability):

1. The US economic recovery is subpar. After rising 4% during Q4-2009, real GDP grows by only 1%-2% during the four quarters of 2010.

2. The unemployment rate rises to 11% by the end of 2010.

3. Consumer spending is very weak due to rising unemployment. Housing starts and home sales decline as mortgage rates and foreclosures rise. Home prices fall.

4. The Fed keeps the federal funds rate near zero through year-end, and is forced to continue buying Agencies to avert a complete housing collapse.

5. Inflation concerns give way to fears of deflation.

6. Stock markets around the world plummet again, led by bank stocks. Sovereign debt crises in the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) spill over into Japan, the UK, and even the US.

7. More bailouts and stimulus programs expand the federal budget deficit on a cyclical basis to another record high.

8.The Obama administration turns more leftist after Congress passes a health reform bill–and pushes for even higher taxes on the rich. The Democrats narrowly hold onto their majorities in both chambers of Congress in November.

9. The Iranians crack down on the pro-democracy movement. Tensions in the Middle East intensify, particularly between Israel and Iran. The price of oil soars over $150 during the summer, but then tumbles.

10.  The Bush tax cuts expire. This sets the stage for another recession in 2011. Future historians describe this period as the “Second Great Depression.”

He also gives his “known unknowns”:

1. Will employers expand their payrolls as they normally do at this point in the business cycle? Or will we have a jobless recovery?

2. Will consumers save more? Or will near-zero interest rates discourage thrift? If consumers pour more money into stocks to get better returns, might the resulting positive wealth effect boost their spending on goods and services?

3. Will higher taxes depress consumer and business spending?

4. Is a second wave of foreclosures ahead? Might higher mortgage rates put a lid on the upturn in home sales?

5. Or, will a normal inventory-rebuilding cycle set the stage for self-sustaining economic growth? In the past, fiscal and monetary policy stimulus measures were no longer needed once self-sustaining growth kicked in. Is this time different?

6. If the private sector deleverages, will the government continue to leverage even more? Will mounting concerns about the creditworthiness of sovereign debt stymie the ability of governments to continue to prop up economic growth?

COMMENT

Neither the bull or bear scenario is likely.

Many of the scenarios contradict one another. Example an amazing recovery AND the GOP wins both House of congress. Very unlikely that BOTH those would happen.

Iranian regime will not fall, but that has nothing to do with the economic recovery, at least short term.

The economy can recover AND helicopter Ben will leave the Fed Funds Rate near 0%. With this Fed they can be exclusive.

Posted by ekaneti | Report as abusive

Why this may still be the American Century

Dec 29, 2009 18:31 UTC

The always fantastic Joel Kotkin lays out the argument:

Demographics

By 2030, all our major rivals, save India, will be declining, with ever-larger numbers of retirees and a shrinking labor force.  … By then, the U.S. will have 400 million people, which may be more than the entire EU and three times the population of our former archrival Russia.

Energy

In terms of energy resources, the U.S., combined with Canada, is the second richest region in the world after the Middle East. The country possesses vast resources of natural gas, about 90 years’ worth, as well as strong areas for wind power.

Food

America remains the world’s agricultural superpower, with the most arable land on the planet. With another 3 billion people expected on the planet by 2050, the U.S. should enjoy a continuing boom in food exports.

Military

The U.S. leads in military technology and, yes, our martial spirit remains a positive factor … Europe and Japan have taken themselves out of the military game, and it will be decades before China will be ready for a head-to-head challenge.

Innovation

There is no large country that comes close to the U.S. as an entrepreneurial hotbed (Taiwan, Israel and Hong Kong come close but are far smaller). The recent Legatum Prosperity Index showed the U.S. remains by far the largest generator of new ideas and companies on the planet.

Diversity

Over the past decade America has produced two African-American Secretaries of State and one President. America remains unique in its ability to absorb different races, religions and cultures, an increasingly critical factor in maintaining global preeminence.

COMMENT

The mantra that ethnic “diversity” is a factor in US global predominance has no basis in reality.

By 2050 at the latest, America will be majority non-white. Can anyone imagine Brazil as a superpower? Enough said.

Posted by Mega | Report as abusive

An interview with Rep. Paul Ryan

Dec 15, 2009 18:51 UTC

I recently had the chance to sit down and chat with Rep. Paul Ryan, a Wisconsin Republican and the ranking GOPer on the House Budget Committee. Ryan’s a rising Republican star (he’ll be just 40 next month), a guy some folks were pushing to be John McCain’s running mate in 2008.  If there’s a young Jack Kemp in today’s Congress, he’s it. And if you’re wondering what the 21st century Republican Party will stand for, many of the ideas will probably come from Ryan. Here are some excerpts from our conversation:

Boosting the economy

I would do whatever I could to keep tax rates low and permanent. I subscribe to the [Milton] Friedman permanent income effect. And I believe in the Kennedy-Mundell-Reagan policy mix of low tax rates and sound money. And that also means getting our debt under control.

Economic outlook

Look what’s going to hit us in 2011. We are going to have a massive tax increase on labor and capital, and the Fed for sure is going to be tight by then. We are doing kind of a cash for clunkers on the whole economy. We are pulling growth from 2011 into 2010. Economic decision makers are looking at the policy climate, and it is horrendous. Then they read the newspapers and see payroll taxes, pay or play, cap-and-trade and this uncertain regulatory environment. It’s the uncertainty tax. There is this enormous uncertainty being injected into the economy, and everybody is sitting on their hands.

Democrats

Our government is led by ideologues, and they are bound and determined to implement a social welfare state, a cradle-to-grave entitlement society, a high-tax, high-government-dependency society. And the countries that have gone down that path have higher unemployment, a lower standard of living and more economic stagnation.

If you listened to the healthcare debate [in the House], the leaders of the Democratic party, they all basically said the same thing: This is the third wave of progressivism, we are finally completing the progressive agenda with passage of this bill. They really believe they can finally transform America into something it’s not.

Value-added Tax

The VAT is coming. They just know they can’t do it before the election. My fear is that the credit markets blow up on us again, we’ll get some shot across the bow by the bond market one of these days. And if the Democrats are still in power, that will bring us the VAT. They will say they have no choice but to do it to save the creditworthiness of the government. It will kind of be like another TARP weekend where the Treasury Secretary and the Fed chairman come to Capitol Hill hyperventilating and out of that comes a VAT. Our government is premeditating a moment like that. But there is another way with real entitlement reform, real tax reform, fulfilling health and retirement security but also paying off our debts and making our economy really competitive.

A deficit commission

I think we should just do our jobs. The way this commission is going to be stacked, I fear, will be for a slow moderation in spending but a big increase in taxes. To really fix this problem, what you’ve got to do is have a defined benefits safety net with a defined contribution system on top. You could design this in different flavors, but that is the gist of what you have to do to wipe these unfunded liabilities off the books.

Financial reform

What I think we are doing here is enshrining “too big to fail” in our system and making a permanent crony capitalist system.

COMMENT

always touching to see an ideologue accuse everyone but himself of being an ideologue

that guy pontificates on fiscal responsibility at every turn without suggesting a single measure to reduce spending whilst advocating cutting taxes

does he have any actual proposals?

Posted by Chi Democrat | Report as abusive

Washington and the 2010 stock market

Dec 10, 2009 16:32 UTC

Here is how economic analyst  Ed Yardeni sees things:

Could the S&P 500 rise back to its record high next year? I was in Boston on Tuesday, and met with the first money manager on Planet Earth to ask me this question. That is definitely a contrarian’s scenario. I am currently predicting a 2010 high between 1300-1350, and more specifically 1332 by March 6, which would be up 100% on a y/y basis, from the Da Vinci Code bottom of 666. Then I see a nasty correction on growing concerns that the expiration of the Bush tax cuts might depress the economy in 2011. That selloff could last until the November Congressional elections. If Gridlock wins, with the Democrats losing their majority control of one or both houses of Congress, then stocks might resume the bull market.

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