By Michael Barone
Thursday, March 07, 2013
The Dow set a new high on Tuesday, but the larger economy
is a different story. What if today’s sluggish economic growth turns out to be
the new normal? That’s the unsettling question asked by some of our most
creative economic thinkers.
And the people asking it are not necessarily partisan
opponents of the Obama administration. They argue that economic-growth rates
were disappointing even before the financial collapse and recession of 2007–09.
Take Tyler Cowen, author of the e-book (belatedly published in print) The Great
Stagnation. Economic growth is the product of increases in the labor supply and
productivity, he argues uncontroversially. But the U.S. labor force — even
assuming we get back to full employment — is not increasing as rapidly as it
did when Baby Boomers and Gen Xers were reaching their working years.
As for productivity, Cowen argues that we simply haven’t
had the kind of innovations in technology or means of production that we saw in
the late 19th and early 20th centuries. Advances in information technology, he
writes, have produced nothing like the productivity gains produced by the
development of electricity, the synthesis of ammonia, the invention of the
internal-combustion engine, and the development of new metal-production
technologies — gains documented in Vaclav Smil’s book Creating the Twentieth
Century: Technical Innovations of 1867–1914 and Their Lasting Impact.
In response to Cowen, Megan McArdle of the Daily Beast
writes, “We are not prepared for low growth: culturally, economically, or
psychologically.” In a fast-growth economy, it makes financial sense for young
people to borrow and for government to transfer money from current earners to
the elderly. That’s why we had government policies subsidizing people’s
borrowing to buy homes and pay for college. Unfortunately, those policies
produced windfall gains for unscrupulous mortgage originators and university
administrators. And they produced the housing bubble that burst in 2007 and the
higher-education bubble that is in the process of bursting now.
Politicians have been searching for policies to restore
the status quo ante bubble. But in a slow-growth, new-normal economy, it
doesn’t make sense to borrow to buy a house whose value will only stagnate. It
doesn’t make sense to take out college loans for a degree that won’t get you a
job. Recent data indicate that young people are taking on less debt than in the
recent past and that applications to many universities are sharply down. And
the policy of transferring money from current workers to retirees — Social
Security, Medicare — simply isn’t sustainable if current workers aren’t going
to be producing and earning substantially more than those they’re subsidizing.
As McArdle writes, “Government accounting is explicitly based on the assumption
that spending grows, in real terms, every year — difficult to achieve unless
the economy grows at least as much.”
Which suggests a question: Is new-normal slow growth
inevitable? Even if you accept Cowen’s argument that productivity-enhancing innovation
occurs sporadically, can’t America do better than it has done in the past five
(or, if you like, dozen) years?
Barack Obama has been trying to stimulate the economy
with record-high government spending funded by higher tax rates and Fed
chairman Ben Bernanke’s low interest rates. But as Stanford economist Michael
Boskin points out in the Wall Street Journal, “Japan tried that, to little
effect, in the 1990s.” Slow growth has become the new normal there.
There are alternative policies. One is to cut government
spending, or cut it more than you raise taxes. As Boskin points out, the
Netherlands in the mid-1990s and Sweden in the mid-2000s “stabilized their
budgets without recession [with] $5–$6 of actual spending cuts per dollar of
tax hikes.” And he notes that Canada reduced government spending in the
mid-1990s and early 2000s by an amount equal to 8 percent of gross domestic
product. Those cuts weren’t painless, but they put Canada on a trajectory
different from ours. Canadian voters value budget surpluses, and Canada managed
to avoid almost all the bad effects of the 2007–09 recession.
Of course policies can’t be transported mechanically from
one country to another. Circumstances and customs inevitably differ. But a
strong case can be made that our current policies threaten to make slow growth
the new normal. And that would be profoundly painful in ways we are only beginning
to imagine.
Republicans are being attacked as irresponsible for
allowing the relatively small sequester cuts to occur. But maybe that was the
responsible thing to do. Maybe it would be responsible to cut spending even
more.
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