Summary: Economists get excited about aggregate GDP (today’s hot economic news dot). People — you, me, our neighbors — care about per capita GDP. GDP that grows along with the population does nothing for our standard of living, (and less than nothing if the 1% cream off most of it). It is important to us, so journalists ignore it (hence the newsroom layoffs).
The economy has recovered since the crash (the doomsters saying otherwise are, as usual, wrong). But the stories about the wonderful economy are also bogus. Per capita real GDP has grown a total of 3.4% since its previous peak in Q4 of 2007 — only 0.4% per year (which is also its YoY growth in Q2 2016). This is secular stagnation. The causes are only somewhat understood; economists have only guesses as to its cure (as usual, delusionally confident guesses).
Growing at 1% – 2% per year since the crash. Slowing fast since 2014.
The latest and best book about this
The essential reading to understand this aspect of modern America — shaping our future while we sleep — is The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. From the publisher…
“In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, home appliances, motor vehicles, air travel, air conditioning, and television transformed households and workplaces. With medical advances, life expectancy between 1870 and 1970 grew from 45 to 72 years. Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth provides an in-depth account of this momentous era. But has that era of unprecedented growth come to an end?
“Gordon challenges the view that economic growth can or will continue unabated, and he demonstrates that the life-altering scale of innovations between 1870 and 1970 can’t be repeated. He contends that the nation’s productivity growth, which has already slowed to a crawl, will be further held back by the vexing headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government. Gordon warns that the younger generation may be the first in American history that fails to exceed their parents’ standard of living, and that rather than depend on the great advances of the past, we must find new solutions to overcome the challenges facing us.
“A critical voice in the debates over economic stagnation, The Rise and Fall of American Growth is at once a tribute to a century of radical change and a harbinger of tougher times to come.”
Gordon has the blinders typical of economists. He is strong on description, weak on visions of possible solutions. There are no easy fixes. Not even the causes are well understood (economists have lists, with little agreement about their relative importance or interrelationships). But there are ways to restart growth, from easy short-term measures (borrow to rebuilt America’s aging infrastructure) to better education and more & better research and development. We are on the verge of a new industrial revolution, if America has the will to grasp it.
What can you and I do?
Both slow growth and rising inequality have afflicted America before. But the combination, if it continues long enough, will destroy the post-WWII society we think of as America. It is a death sentence for the Republic.
So why is secular stagnation another missing issue in Campaign 2016? It, foreign wars and growing inequality form a trifecta of serious issues ignored amidst the lavish promises and childish bickering. Seldom in US history have so many obvious problems been ignored simultaneously — a clear sign of our dysfunctional politics.
But we control the agenda. We can send letters and emails to the candidates, journalists, and political gurus. Talk to people you know. Demand serious proposals, not vague promises with magic asterisks for the key steps. Make the campaign about America’s future, not a war of memes and silly photos.
We are citizens, not spectators of political theater or consumers in Cafe America. Let’s act like it. Start by changing the Man in the Mirror.
For More Information
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about economic growth, about secular stagnation, and especially these…
- Why America’s growth is slowing, and a solution — Imagine bringing June Cleaver from her 1957 home to today’s equivalent; she’d be astonished at our lack of progress. Look at how we’ve underperformed futurist Herman Kahn’s 1967 expectations for the year 2000.
- Larry Summers gives us the bad news. Worse, the only solution is more of the same.
- Do we face secular stagnation or a new industrial revolution?
- The IMF warns us of economic stagnation & suggests fixes. We should listen.
- Ben Bernanke sees the great slowdown in technological progress.
- The Fed sees years of slowing growth. Prepare for years of political turmoil.
- Trump & Clinton ignore America’s too-slow economic growth. We can change that!
21 thoughts on “The secret but vital to know number in today’s economic news”
Reuters journalist James Saft (@JamesSaft) points to Japan. Since 2007 their per capita real GDP has risen only 1.8%, which is 0.2%/year — half the speed of ours.
But we are not Japan. I doubt the US can survive the tension created by stagnant GDP growth, rapidly rising inequality (the 1% cream off the growth), and high levels of immigration. That is a lethal trifecta for America, with our high household and business debt loads.
I think demographics accounts for a lot of the slow growth. The millennials which is a generation as large or larger than the boomers have not really gotten started on household formation yet. But the boomers have begun to retire, and down size. Household formation is a main driver of economic growth. The tendency has been to marry later if at all, this the delay. As more millennials enter their prime working years we hope to see some increase in growth.
Economists have analyzed this extensively, looking at growth slowdowns across the developed world. Robert J. Gordon gives a summary in “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds“, a paper for the National Bureau of Economic Research, August 2012.
None of these causes are permanent factors. The demographic wave of aging will pass. Technology will begin to advance again — the signs of a new industrial revolution suggest this has already began. Globalization is a transitional phase. etc. But a few decades of slow growth could inflict considerable damage.
Besides growth (and distribution) of GDP there is also the idea that working people might make a much more efficient use of their limited time and resources to satisfy their basic human needs:
Amazon: A Part-time Job in the Country: Notes Toward a New Way of Life in America
“In this post-Christian utopia, Luke Lea explores a world of small country towns in which the people work part-time outside the home, and in their free time build their own houses, cultivate gardens, cook and care for their children and grandchildren, and pursue various leisure-time activities. They live on small family homesteads grouped around neighborhood greens, and get around town in glorified golf-carts. So thoroughly are work and leisure integrated into the fabric of their everyday lives that they don’t feel much need to retire, and they die at home in their beds as a rule, surrounded by loved ones.”
While such works of fantasy are fun to read, I worked as a social worker in one of those “small country towns”. Zero opportunities for people to better themselves, class divisions etched into stone, and grinding work and poverty for a large fraction of the population. Young people with skills and ambition flee these towns as fast as possible.
On the other hand, these are useful books for an America with inequality rising so rapidly. Unless we do something, these fantasies will be all that we have to sustain our spirits. Plus drug and booze, also popular ways to help the time pass in small towns.
Small country towns is really a misnomer. What I am actually proposing are New Country Towns modeled on the English garden city idea, with populations in the 30,000 range and located 40 to 70 miles from the nearest major metropolitan area. You could think of them as the next stage in suburban development, made possible by modern transport and communications technologies. Even so they would not be for everyone, that I admit, and in fact I propose strict standards for future colonists in terms of marriage, commitment, and financial resources.
Those strict standards would also include skills, education, and law-abidingness. It is a quasi-religious idea.
And the real standard of living, I argue, would be equivalent, if not higher, than the current median for a variety of reasons, including higher productivity for part-time workers with incentive wages (people can work faster and more efficiently for shorter periods of time than for longer, just as in track and field the short-distance runners always fun faster than the long-distance ones. There would be collective bargaining and also conceivably, some day, wage subsidies along the lines described here: https://docs.google.com/document/d/1qJCdkd50kFib3VqagZdSZiPYSKNpZ83JQ6LteKbLWuE/edit?usp=sharing
Even so I admit nothing like this will happen in my lifetime, if ever.
It’s an interesting idea. But ideas on paper often look wonderful.
Here’s a suggestion: a concept is understood when a person can state both sides with completeness. When a stockbroker pitches a stock to buy, ask him to state the bear case (there is always one). Write out the bear case for your idea, why your hopes for its higher productivity (for example) might prove difficult or impossible to achieve. At the end of this exercise you’ll understand the concept better.
Note that there is a long history in America of attempting these “clean paper” start-up communities. The many 19th C religous communities (a few remain, such as Sabbathday Lake Shaker Village) Henry Ford’s Fordlandia, and the 1960s communes. Understanding why almost all of these failed would provide a foundation for future dreams.
There is also a long tradition of imaginative concepts for new communities, such as Walden Two by behaviorist B. F. Skinner. There’s much to learn from these as well.
Ok. Let’s start with how real physical wealth is created. It was Schumpeter who first wondered how the obvious explosion in real wellbeing after thousands of years of meager human progress had occurred. His answer: First came double entry bookkeeping. Like most amazing human triumphant achievement it’s boring. Once every man, every economic entity, everybody has a balance sheet, Schumpeter asked: If every man’s expenditure is another man’s income (and thus not available for new risk capital expenditure) where does new societal capital for new entrepreneurial venture come from? Someone, somehow must be evading the rules of double entry bookkeeping to do so.
His answer, which was correct, (because he had been a banker) is that banks lend money they don’t have. Yep. Banks loan money they don’t have on deposit from savers. True under a gold standard. True under a fiat money system. True today.
He called this expansion of the money supply, a form of “forced savings” by society. This creation of new credit money by banks combined (or inextricably linked) with a balance sheet world, explained the undeniable explosion in real wealth, longer life, increased population, more fossil fuel leverage, increased energy exploitation, and so on, that characterized the last few hundred years.
Then came Minsky.
Minsky had more trailing historical data. He had, for example, the Great Depression. Minsky said: There is a potential instability in the wealth creating engine described by Schumpeter. Slowly but surely, bankers, who are essentially happy robots, start out claiming they only focus on earnings. Houses are worth 100 times their monthly rental income. Equities are worth no more than 7 times their trailing twelve months earnings etc. In the end game bankers say: houses are worth what other houses in the same neighborhood sell for per professional assesors. Stocks are worth what the market deems they are worth. In other words: The price justifies the price, not the earnings.
And here we are. No more fantastic wealth creation by shrewd bankers judging character of borrowers, allocating precious (and banker created) societal capital to entrepreneurs with empty balance sheets and thus no resources. Now, we have bankers ignoring old rules. We have a Minsky instability end game. Our only question is how shall we deal with our reality?
“Let’s start with how real physical wealth is created. ”
I always stop reading when people believe high-level questions (e.g., economic growth, reliability of climate models) can be answered by going back to ground-level basics. Experts almost never do so, for very good reason — the chain of logic and data necessary to do so is that of a book, not a blog comment.
Giving cites to experts’ grappling with this question would be useful. Your comments have shown that you lack the grounding in economics to do so.
The correlation between total private debt and unemployment from 1990 to now is -0.93. Neoclassical economics argues that total private debt is irrelevant because banks simply intermediate between savers and borrowers. Thus money moves from one balance sheet to another but total money supply stays fixed. Steve Keen argues that this is wrong, that Schumpeter was right, that economics took a serious wrong turn when the simplifying assumption that banks don’t create new money supply by lending was horribly wrong, and that this error continues to block needed policy actions right now. As Keen quips when showing the plot of unemployment vs total private debt: It takes a lot of special training to ignore data like this!
“The correlation between total private debt and unemployment from 1990 to now is -0.93.”
That’s an absurd factoid, showing a near-zero grasp of both economics and statistics.
I used to wonder if you had actually read anything by Keynes or Minsky (rather than right-wing pastiches of them). Now I suspect you’ve never read an Economics 101 textbook.
Is a definition for correlation between two time series over an interval.
From an analysis of variance standpoint a correlation of -.93 over thirty years suggests that only 7% of the movement in one variable cannot be predicted by a change in the correlate over that time frame. Thirty years is a long time for two time series to be so highly correlated without a meaningful underlying causative link. Correlation is not causation. If that’s your point I agree.
Are you suggesting those of us trained in applied math or physics should question nothing concerning our world while minding our betters in matters of economic policy? Then sir, what is the point of your blog?
If you’d like some embarrassingly absurd quotes by Krugman and Bernanke stating that total private debt is unimportant to macroeconomic theory despite this correlation suggesting otherwise I will. They’re pretty gobsmacking to read given the empirical contradiction.
We’ve had scores of these discussions. Since you lack Econ 101 level knowledge, correcting your misunderstandings is like blotting up the Atlantic with a Kleenex. There are too many things wrong with this to begin.
US also has nothing like what Fraunhofer has helped Germany with:
“How Does Germany Do It?” by Charles W. Wessner, ASME, Nov 2013 — About German manufacturing.
“Why Germany Dominates the U.S. in Innovation” by Dan Breznitz, Harvard Business Review, 27 May 2014.
Germany has done well, unquestionably. Neither of these articles tells us much, imo.
The first attempts to explain Germany’s export success — without considering the financial factors largely responsible. suppressing wages (Hartz reforms, mass immigration), cheap currency, easy financing (which has wrecked their banks, including its titan — Deutsche Bank). Many of these have generated massive unanticipated side effects: wrecking the economies of southern europe, rising inequality, social and political tensions (including the rise of the far right). Time will tell how this bold program plays out.
The second gives a bold assertion in its title, that German dominates the US in innovation, but gives not the slightest shred of supporting evidence. The theory is absurd. Just to give one small contrary item: Fortune’s list of the world’s top technology companies lists one German corp (SAP).
Not to mention Germany is running fiscal surplusses in the middle of a European depression. Talk about ignoring Keynes!
“The second gives a bold assertion in its title, that German dominates the US in innovation, but gives not the slightest shred of supporting evidence. The theory is absurd. Just to give one small contrary item: Fortune’s list of the world’s top technology companies lists one German corp (SAP).”
This is a very typical mistake made by US observers of the german market: It is assumed that in Europe the importance of larger companies is as huge as it is in the USA. Or from a different POV, the US observers usually assume that European SMEs are as unimportant as their US couterparts.
However, if you check the concept of “Hidden Champions” (BTW this was published 25 years ago) then you will find that most of these companies, there are 3000 world wide, are in Europe with a clear focus in the German countries Austria (140), Switzerland (140) and Germany (1400), in contrast the USA has only 400. These companies make for the German countries the difference.
The next step is to understand why SME in Germany can gain and maintain technological leadership, here the Fraunhofer Society does a very good job by providing a group of SMEs with similar interests a framework to do R&D on a high level; the companies share the IP.
And the last step would be to understand why these companies work or – more precise – are able to work with a completely different business culture in comparison to VC driven business in the USA.
“This is a very typical mistake made by US observers of the german market”
Eveidence would be nice, not yet more bold assertions. But granting your assertion, it’s nice that small German companies are innovators. That this gives Germany dominance in innovation is absurd. They might be inventing things on a larger scale than the US (unlikely), but if they were rolling out these technologies into the global markets they would become large companies.
To see small companies innovate look at the US — and no bold but unsupported assertions are needed. Look at that list of the world’s giant tech corps. Apple (founded 1976). Amazon (1994), Google (1998), Cisco (1984), Oracle (1977), EMC (1979). Small companies innovate and become giants in one or two generations.
To see the process happening even faster, look at the giant social media companies: Facebook (2004), Twitter (2006), etc. Or electric & autonomous cars: Tesla (2003). Or biotechnology (lots of young US companies changing the world).