Summary: The US economy has repeatedly failed to resume normal growth after the crash. But potentially worse is the decline in long-term growth estimates. This is part one; see part two: Has America’s economy entered the “coffin corner”?
My guess: these two posts will be another set with non-consensus views that proves prescient. If so I’ll cite them frequently, forever.
Contents
- Our plight: max growth slowing to stall speed
- New hot research about slowing growth in the US
- The Economic Cycle Research Institute also sees the problem
- About The Economic Cycle Research Institute
- New hot research about slowing growth in the US
- For More Information
(1) Our plight: our maximum growth rate slowing to our stall speed
In January 2011 the Federal Research estimated the long-term growth rate of the US economy at 2.5 – 2.8%. By June this year their estimate had fallen to 2.1 – 2.3%. Years of low investment by the private and public sector (see links below), a decaying education system, rising debt levels, and demographic headwinds (an aging society) — all these things are slowing America’s growth.
The potential boost from technology so far remains speculation about the future.
For tangible evidence see the economy’s inability to “take off” since the crash (GDP has limped along at an average of 2.2%). On January 3 JP Morgan forecast 2014 GDP to be 2.8%, the fastest since 2005. Now they expect half that, 1.4% — the slowest since the 2008 crash.
That’s far too close to the economy’s stall speed of 2%, below which it’s at risk of falling into recession — much like an airplane going too slow, generating insufficient lift to stay aloft (this is a controversial theory; now we’re testing it). Perhaps the US economy cannot accelerate by much from current growth rates (without undesirable rates of inflation), and it cannot slow without falling into recession (ruinous under current conditions, with monetary policy tapped out (ZIRP), fiscal deficits and unemployment still too high (but falling).
This will make economic management quite difficult for the foreseeable future. Persistent slow speed will create pressure for stimulus (perhaps with long-term ill consequences). Failure to quickly stimulate to even small mistakes might easily trip the economy into recession.
(2) The Economic Cycle Research Institute also sees the problem
Excerpt from “Cognitive Dissonance at the Fed?“, ECRI, 30 May 2014:
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Federal Open Market Committee (FOMC) members have long submitted their projections of U.S. real GDP growth for the “longer run,” to which they expect it “to converge over time – maybe in five or six years – in the absence of further shocks and under appropriate monetary policy.”
… So what is being gradually acknowledged – without any publicity or fanfare – is that long-term U.S. GDP trend growth is converging towards its 2% stall speed. If so, almost every time GDP growth experiences a slowdown that carries it below trend, it will also fall below the recessionary stall speed. This is an implicit endorsement of ECRI’s longstanding “yo-yo years” thesis, which predicts more frequent recessions for the advanced economies than we have seen in past decades.
Separately, a recent ECRI report (click to download) demonstrates how the yo-yo years are already a fact.
(3) About the Economic Cycle Research Institute
The ECRI is an independent research institute. Their indicator systems predict the timing of changes in an economy’s direction, before the consensus of economists. For information about their approach, see their About page.
(4) New hot research about slowing growth in the US
(a) “Declining Business Dynamism in the United States: A Look at States and Metros“, Ian Hathaway and Robert E. Litan, The Brookings Institution, May 2014 — Abstract”
Business dynamism is the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over. Research has firmly established that this dynamic process is vital to productivity and sustained economic growth. Entrepreneurs play a critical role in this process, and in net job creation.
But recent research shows that dynamism is slowing down. Business churning and new firm formations have been on a persistent decline during the last few decades, and the pace of net job creation has been subdued. This decline has been documented across a broad range of sectors in the U.S. economy, even in high-tech.
… we show that dynamism has declined in all 50 states and in all but a handful of the more than 360 U.S. metropolitan areas during the last three decades. Moreover, the performance of business dynamism across the states and metros has become increasingly similar over time. In other words, the national decline in business dynamism has been a widely shared experience. While the reasons explaining this decline are still unknown, if it persists, it implies a continuation of slow growth for the indefinite future, unless for equally unknown reasons or by virtue of entrepreneurship-enhancing policies (such as liberalized entry of high-skilled immigrants), these trends are reversed.
(b) “Productivity and Potential Output Before, During, and After the Great Recession“, John G. Fernald, Federal Reserve Bank of San Francisco,
June 2014 — Abstract:
US labor and total-factor productivity growth slow ed prior to the Great Recession. The timing rules out explanations that focus on disruptions during or since the recession, and industry and state data rule out “bubble economy” stories related to housing or finance. The slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains.
(5) For More Information
(a) Watch America burning its future by consuming much, investing little:
- Two pictures show an important difference between China and America, 2 February 2011
- Why America’s growth is slowing, and a solution, 28 January 2013
- Portraits of a nation in decline. An unnecessary and easily fixed decline., 14 February 2013
- Four graphs showing a nation in decline. An unnecessary and easily fixed decline., 1 November 2013
- Watch corporations strip-mine their future (and ours), 18 April 2014
(b) About America’s growth potential:
- Has America grown old, and can no longer grow? Or are wonders like the singularity in our future?, 28 August 2012
- Is America on the road to zero growth?, 29 November 2012
- Why America’s growth is slowing, and a solution, 28 January 2013
- Will 21st Century USA have a surprise boom, as did the 19th Century UK?, 23 October 2013
- Looking at America’s future: economic stagnation, or will computers take our jobs?, 7 January 2014
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You wrote that “Persistent slow speed will create pressure for stimulus (perhaps with long-term ill consequences).”
Could you please elaborate upon exactly what those “long-term ill consequences” (of stimulus spending) might be?
And please don’t bore us with any mention of inflation. That has been the bogey-man pulled out by anti-government spending forces to scare us all for the longest time, yet despite record setting levels of government spending in the last two decades, we have yet to see any signs of serious inflation. (Let alone that dreaded hype-inflation we have all been warned about and were repeatedly assured was just around the corner if we failed to curb our profligate ways.)
Stranger,
(1) “And please don’t bore us with any mention of inflation.”
You mean my 35 posts since the recession started, explaining that inflation was not a problem in the developed world. How sad that you found them boring.
(2) Ill effects of continued stimulous
This is Econ 101, but always useful to review.
Monetary stimulus, the most likely to be used in the US and Europe, for political reasons, comes at present in two forms: low rates (ZIRP) and quantitative easing (QE). These distort the most important price signal in a free-market economy, the price of money — and will cause large-scale mal-inevestment if continued. There is also a risk of investment and/or asset price bubbles. Furthermore, using these to maintain growth means that they’re unavailable (or only to a limited degree) should the economy encounter a shock and slide into recession (ie, the Fed being “out of bullets”).
There are deeper problems, but those are the Econ 101 ones.
Fiscal policy has its own problems if misused, but the specifics depend on the circumstances.
* The US is entering a period of structural deficits from the retirement of the boomers. It’s tolerable, but might become destabilizing if on top of that we have large prolonged cyclical (i.e., from stimulus) deficits.
* Japan shows that deficits can become politically entrenched, eventually running the debt up to disturbing levels. It’s not clear how slow-grwoth, aging, low fertility nations like Japan (or ones with large but smaller loads, like Italy) can handle these.
* Crowding out can occur, depending on other factors — such as the private sector’s deficits, the current account dynamics, and the central bank’s open market activities.
* High debt levels can reduce investors’ perception of the governments’ credit status, causing interest rates to rise.
There are others, but this gives a feel for the issues involved. None of this is simple.
More on this later, but “crowding out” has definitely been shown (by several credible economists) to be a canard and thus not to be taken seriously .
Stranger,
Absurd. It has been shown not to have happened under these circumstances, in this cycle.
Stranger,
From the climate threads, I’ve grown tired of people saying that scientists are wrong. Please stick to citing peer-reviewed articles, or those from an authoritative sources (e.g., Fed research, conference papers, etc), or articles from economists citing (i.e, explaining) such.
@FM
First you say that crowding out could be a possible “long-term ill” consequence of stimulus spending, and then you say that is an “absurd” claim, that crowding out has been “shown not to have happened under these circumstances, in this cycle”. So I am not quite sure what your position vis a vis this issue actually is.
However, regardless of this problem (i.e., your contradictory statements) consider the following from Wikipedia (http://en.wikipedia.org/wiki/Crowding_out_(economics)
“Usually when economists use the term “crowding out” they are referring to the government spending using up financial and other resources that would otherwise be used by private enterprise. However, some commentators and other economists use “crowding out” to refer to government providing a service or good that would otherwise be a business opportunity for private industry.
The extent to which crowding out occurs depends on the economic situation. If the economy is at capacity or full employment, then the government suddenly increasing its budget deficit (e.g., via stimulus programs) could create competition with the private sector for scarce funds available for investment, resulting in an increase in interest rates and reduced private investment or consumption. Thus the effect of the stimulus is offset by the effect of crowding out. On the other hand, if the economy is below capacity and there is a surplus of funds available for investment, an increase in the government’s deficit does not result in competition with the private sector. In this scenario, the stimulus program would be much more effective. In sum, changing the government’s budget deficit has a stronger impact on GDP when the economy is below capacity. Since the 2008 subprime mortgage crisis, the U.S. economy has been well below capacity and there is a large surplus of funds available for investment, so increasing the budget deficit put funds to use that would otherwise have been idle.”
Therefore, since the current problem in the US is that the economy is running well below capacity, especially in terms of employment, I stand by my assertion that raising the specter of stimulus spending possibly having the ill-effect of crowding out (private investment), is a canard, a ruse that should not be taken seriously.
In regards to your desire to have me link to scientific sources re this issue, the first question that should be addressed is whether or not economics is even a science to begin with!
my statement was quite clear. Crowding out is a consideration, possible in the future — but has not happened to us in this cycle. It is not in these least contradictory. Why is this difficult to understand?
Sorry FM, to have dared to tread upon your quite obvious superior command of the English language, logical thought, and expository prose.
Is it any wonder that so few dare challenge you to any sort of meaningful dialogue or discourse regarding any subject, whether climate change, economics, or world history, in which you deem yourself to be such an overwhelming, formidable, and self certified expert (especially as you can so effortlessly wield links to the most arcane of expert reports).
For it is now clear to me (and indeed should have been for quite some time now) that all who attempt to do so are certain to meet with a most gloomy and rather ignoble fate, one of utter and complete failure, one from which there can be no redemption or salvation, and are certain to wither away under your steadfast glaze as well as unrelenting admonitions and most stern and unforgiving criticisms.
Stranger,
Words are what they are. I don’t see how your comment is a rebuttal to my simple statement.
Stranger,
“Is it any wonder that so few dare challenge you to any…”
The FM website has had 32 thousand comments posted since 2007. The average post in June got 15 comments, which is about par for these kind of technical content I’m writing lately. That is considerably higher than other similar websites (e.g., the much higher trafficked website of Brad DeLong).
Posts about hot issues get more. Like those about Obama and Palin. The post about the “Castle” finale got 65, about “Castle” and modern romance got 34.
But numbers is only one dimension by which to evaluate comments. Most of the comments on the FM website challenge the posts, usually at length. Websites with a high volume of comments tend to have most one or two sentence-long comments of snark (e.g., Lawyers, Guns, and Money — very high quality snark, but quite low calorie). I prefer what we have here.
There are those website that have developed a real community (e.g., Climate Etc). The FM website had the beginnings of that, which I killed by briefly turning off comments. Advocacy of torture and war, belief in faux economics — reading the comments were nightmarish. These people were immune to any rebuttal. It was like WWZ.
For details about the challenge of comments, and how others handle them, see: the About Comments page.
Stranger,
“Is it any wonder that so few dare challenge you to any…”
If only! Then I could reading the comments and bask in confirmation bias, like most people — whose website comments are mostly by fans. Not so here, which I find disturbing but is perhaps good for my character, mind, and soul. In fact there are many comments, most quite long and well-reasoned, and overwhelmingly posting disagreement with some or all of the post. In evidence I post these from last year. In the last year or so I’ve written mostly on technical subjects, without the political clickbait that provokes comments (e.g., the posts about torture, our mad wars, Bush jr, Obama, and Sara Palin).
Here’s are the tops threads of 2014:
As Shakespeare so aptly put it:
“The lady doth protest too much, methinks”
From Wikipedia (http://en.wikipedia.org/wiki/The_lady_doth_protest_too_much,_methinks)
A quotation from the 1602 play Hamlet….(it) has been used as a figure of speech, in various
phrasings, to indicate that a person’s overly frequent or vehement attempts to convince
others of something have ironically helped to convince others that the opposite is true, by
making the person look insincere and defensive.”
Stranger,
It is a difference in outlook. You prefer to make up stuff, with vague and poorly reasoned statements — an an inability or unwillingness to explain or defend your statements.
Others ride on different paths.
There is little else to say.
If there is little else to say, then you must’ve said it all!
Also. if you would like I would be more than happy to go through many of your posts and point out obvious typos and incorrect usage (sometimes to the point of painful incomprehensibility) of grammar.
Here’s an example from this post:
“Failure to quickly stimulate to even small mistakes might easily trip the economy into recession.”
It might have read a bit better if you would have included after the word “stimulate” the words “…in response to…”.
But hey, no one’s perfect (so carry on).
I expect your response will now be that…
“There are others, but…None of this is simple”
And of course your response to my assertion that your posts are replete with typos and grammatical errors can only be that my assertion is…
“Absurd. It has been shown not to have happened under these circumstances…”.
And finally, we dare not conclude without addressing your question of “Why is this difficult to understand?”
The answer to which can only be (a la Don Rumsfeld’s infamous words of wisdom and advice to the US Army as they struggled so valiantly to bring freedom to that sorry and misbegotten collection of camel drivers and planters of IEDs in Iraq) that this is not only an example of a “known unknown”, but also that we must post on the internet with the bloggers we have, as opposed to the bloggers we wished we had!
No duh. America over the past 30 years has become the Land of the Giant Monopoly. So small new businesses increasingly have a hard time starting up because they get crushed by the giant monopolies. From small internet providers (crushed by one of the five giant nationwide internet providers like Comcast) to mom-and-pop computer stores (crushed by giant suppliers like Dell) to mom-and-pop grocery stores (crushed by giant monoliths like Wal*Mart) to upstarts like Tesla Motors (actively facing attempts to crush it by legislation bribed into existence by the giant automotive companies that makes it illegal to sell Tesla cars in various states), the story is always the same: giant monopolies prevent new businesses from starting up in America.
To amplify what FM mentioned about the bad consequences of continued sluggish near-recession economic growth:
* When FM talks briefly about “malinvestment” due to low cost of money, what he really means is “rampant financial speculation of the kind that destroyed the world economy in 2008-2009.” When the cost of money gets too cheap, hedge funds see this as an opportunity to load up with massive leverage and play casino capitalism. Alas, this always results in a giant bubble and eventual financial crash. There are signs that we’re in another real estate bubble, as FM has previously noted. Once again, this is due to low interest rates, which make mortgages unreasonably cheap and which also destroy the returns from savings accounts or IRAs. So everyone winds up flipping houses and apartment buildings to make money, because that’s one of the only ways left to make money in this economy. Ditto the rise of payday loans and ludicrously long-term (7 year!) auto loans. Once again, unreasonably low interest rates make these kinds of Ponzi schemes profitable in the short term, but, as FM has pointed out, in the long term these kinds of schemes eventually blow up, because auto values aren’t rising and poor people can’t continue to pay back outrageous payday loans forever, and houses whose value has risen since the 2009 crash can’t continue to rise forever, and eventually the whole market crashes.
When that happens, the giant firms that invested money will go begging to the federal government and get bailed out…while consumers will get the shaft.
* In a sluggish economy like this one, so many people wind up out of work for so long that they get locked out of the jobs market. This creates a large structural unemployment rate because employers refuse to hire people who’ve been out of work for 2 years or 3 years or 5 years. That damages the economy badly because it drastically shrinks the pool of available labor.
* In a sluggish economy, workers wind up locked into their jobs because they’re afraid if the quit and look for a better job, they won’t find one. This makes for an inefficient economy because workers who make a bad fit in their current jobs won’t leave.
* Recent history shows that when the economy slows down drastically, large firms will choose to automate jobs or offshore them rather than laying workers off and rehiring them. This means that each time the economy slows down drastically, large numbers of jobs are permanently lost. This used to not happen: once upon a time, when the economy slowed, firms laid workers off and then re-hired them. But those days are long gone.
To expand on Thomas More’s comments, I read a very grim and depressing statistic yesterday on CNN. It was contained within a photo exhibition of young men in Connecticut created by a photographer who attended high school with many of them. Her subjects are all struggling with the same problem, that of being unable to leave home and in many cases having difficulty completing a college degree for financial reasons despite the fact that the majority of jobs which offer any significant chance for advancement require a college degree. On the subject of the “American Dream”, most of her subjects stated that they either no longer believe in it at all or believe that it is out of their reach. (The page is here)It struck me as tragic that these young men, who are just beginning their lives, already perceive themselves as having little or no reason to hope that they might achieve the kind of life to which our society says a young person — but especially a man! — should aspire.
This was the statistic — and since it was reported by an organization with some reputation (The National Employment Law Project), I see no particular reason to doubt or dispute it. From 1982 to 2007, the cost of college tuition rose by 439%. During the same period, the average median household income rose by only 147% — not even half of the rate at which college tuition has gone up, and in fact barely a *third* of the rate (do the math). To make matters worse, 58% of the jobs that have been created during the so-called “recovery” (which has yet to show significant effects on the lives of many ordinary Americans) have been low-wage jobs in industries such as retail or food preparation. I really shouldn’t need to point out why this is not just deeply troubling but outright terrifying because of what it implies — and not just about our present but about our future (both short-term and long-term) as well.
A college degree has for the past couple of generations been touted as an important stepping stone toward the American Dream even though there has never been a time in our history when more than 50% of Americans have possessed one — although in recent years, some people have begun to question whether a college degree is a worthwhile investment (especially since the current state of the job market does not seem to justify one). As I mentioned in a comment to the post about Techno-Utopians on this site a few days ago, one of the savage ironies about technological development these days is that understanding it requires higher education but the costs of that education put it out of reach of a growing number of Americans. Even my father, who is by nature a phlegmatic soul, is becoming alarmed and dismayed by the way in which our society is essentially choosing to turn its back on people who might have good ideas but are blocked or prevented from realizing or implementing them because they do not have access to the kind of education which could help make these ideas a reality. There are other signs as well which indicate that we’re choosing to turn our backs on the many so that the few who are already well ahead of the game can benefit and enrich themselves even further.
There’s something profoundly wrong with this, not only ethically but practically — this is *not* a pathway to a healthy, efficient, productive, and thriving society which is beneficial to a significant majority of the people. This is a society which is in decay…or as Peter Joseph from the Zeitgeist Movement puts it, a culture in decline. I find myself reminded of the quip attributed to Oscar Wilde which declared that “America is the only country which went from barbarism to decadence without civilization in between.”
The process bluestocking describes may be “profoundly wrong,” but it’s exactly what you’d expect from a cursory economic analysis of the situation.
Consider: automation + offshoring is elminating non-professional jobs, and drastically lowering wages for non-college-graduates. This creates enormous demand for college degrees. The supply of colege degrees, especially degrees from the most prestigious and valuable Ivy League universities is strictly limited. Moreover, the supply of high-end college degrees is a non-substitutable good with inelastic demand (to use econ-101 terms). This means that the price of a college degree is bound to increase exponentially.
Moreover, we can see the same process at work in non-college educated professions. The exponential rise of credentialing legislation (and the consequent cost of training) for professions like beautician has paralleled the exponential rise in college tuitions since the 1980s. What’s happening is obvious, and predicted by basic economics 101. Whenever supply of some non-substitutable good with inelastic demand becomes limited, supply and demand will force a drastic price increase. Moreover, this exponential price increase will shockwave down to similar goods, if they are rival goods but non-subtitutable.
What we’re seeing, in other words, is that when a college degree becomes the basic requirement for entry into the middle class, the cost of tuition is headed to the moon and beyond. But this also affects the cost of credentials for non-college-degree jobs like beautician — the cost of training for a credential for these kinds of professions has also skyrocketed, because these professions have convinced state legislators to pass laws requiring expensive credentials in order to enter these professions, the better to prop up the salaries of non-college graduates.
In econ-101 terms, a beautician’s or barber’s license is a rival but non-substitutable good. The demand for these profession is elastic, so these professions have quite naturally taken steps to sharply limit the supply by lobby for laws requiring credentials. Eventually you’ll need to take a 3-year course, invest tens of thousands of dollars, and take a four-day test in order to get a credential to become a waitress or a barista or a xerox shop copy clerk.
In short, we’re heading back to a medieval guild system, economically speaking. Martin van Creveld was right: we are living in the New Middle Ages.
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