Thursday, June 2, 2016

WSJ growth oped -- full version

WSJ Oped. Now that 30 days have passed, I can post the whole thing. Previous post.

Ending America’s Slow-Growth Tailspin

Sclerotic growth is America’s overriding economic problem. From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate—1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%. Last week’s 0.5% GDP report is merely the latest Groundhog Day repetition of dashed hopes.

The differences in these small percentages might seem minor, but over time they have big consequences. By 2008, the average American was more than three times better off than in 1952. Real GDP per person rose from $16,000 to $49,000. And those numbers understate the advances in the quality of goods, health and environment that came with growth. But if U.S. growth between 1950 and 2000 had been the 2% of recent years, instead of 3.5%, income per person in 2000 would have risen to just $23,000, not $50,000. That’s a huge difference.

Looking ahead, solving almost all of America’s problems hinges on re-establishing robust economic growth. Over the next 50 years, if income could be doubled relative to 2% growth, the U.S. would be able to pay for Social Security, Medicare, defense, environmental concerns and the debt. Halve that income gain, and none of those spending challenges can be addressed. Doubling income per capita would help the less well off far more than any imaginable transfer scheme.

Why is growth slowing down? One camp says that we’ve run out of ideas. We were supposed to have flying cars and all we got was Twitter. Get used to it, the thinking goes, and start fighting over the shrinking pie.

Another camp holds that the culprit is “secular stagnation,” a “savings glut” demanding sharply negative interest rates that the Federal Reserve cannot deliver. That outlook attracts clever new economic theories and promotes vast new stimulus spending of the sort that Japan has fruitlessly followed.

The third camp (mine) holds that the U.S. economy is simply overrun by an out-of-control and increasingly politicized regulatory state. If it takes years to get the permits to start projects and mountains of paper to hire people, if every step risks a new criminal investigation, people don’t invest, hire or innovate. The U.S. needs simple, common-sense, Adam Smith policies.

America is middle-aged and overweight. The first camp says, well, that’s nature, stop complaining. The second camp looks for the latest miracle diet—try the 10-day detox cleanse! The third camp says get back to the tried, true and sometimes painful: eat right and exercise.

The first two camps are doubtful. How much more growth is really possible from better policies? To get an idea, see the nearby chart plotting 2014 income per capita for 189 countries against the World Bank’s “Distance to Frontier” ease-of-doing-business measure for the same year. The measure combines individual indicators, including starting a business, dealing with construction permits, protecting minority investors, paying taxes and trading across borders. Unlike the more popular ease-of-doing business rankings, this is a measure of how good or bad things are with 100 being the best observed so far, or “Frontier,” score.

In general, the higher a country’s score, the higher its per capita income. The Central African Republic scores a dismal 33, and has an annual per capita income of just $328. Compare that to India (50.3, $1,455), China (61, $7,000) and the U.S. (82, $53,000).

The U.S. scores well, but there is plenty of room for improvement. A score of 100 unites the best already-observed performance in each category. So a score of 100—labeled Frontier—is certainly possible. And, following the fitted line in the chart, Frontier generates $163,000 of income per capita, 209% better than the U.S., or 6% additional annual growth for 20 years. If America could improve on the best seen in other countries by 10%, a 110 score would generate $400,000 income per capita, a 650% improvement, or 15% additional growth for 20 years.

If you think these numbers are absurd, consider China. Between 2000 and 2014, China averaged 15% growth and a 700% improvement in income per capita. This growth did not follow from some grand stimulus or central plan; Mao tried that in the 1960s, producing famine, not steel. China just turned an awful business climate into a moderately bad one.

It is amazing that governments can do so much damage. Yet the evidence of the graph is strong. The nearly controlled experimental comparison of North Korea versus South Korea, or East Germany versus West Germany, is stronger. But if bad institutions can do such enormous harm, it follows inescapably that better institutions can do enormous good.

A growth agenda doesn’t fit neatly into current policy debates. This is fortunate, as new ideas are easier to swallow than defeats.

Parties argue over tax rates, but what’s really needed is deep tax reform, cleaning out the insane complexity and cronyism.

Parties argue over how much to raise or cut spending for social programs, but what’s needed is a thorough overhaul of the programs’ pernicious incentives. For example, Social Security disability needs to remove its disincentives to work, move or change careers.

Parties argue about education spending, but America needs the better schools that come from increased choice and competition.

Most of all, the country needs a dramatic legal and regulatory simplification, restoring the rule of law. Middle-aged America is living in a hoarder’s house of a legal system. State and local impediments such as occupational licensing and zoning are also part of the problem.

Growth-oriented policies will be resisted. Growth comes from productivity, which comes from new technologies and new companies. These displace the profits of old companies, and the healthy pay and settled lives of their managers and workers. Economic regulation is largely designed to protect profits, jobs and wages tied to old ways of doing things. Everyone likes growth, but only in someone else’s backyard.

There is hope. Washington lawmakers need to bring about a grand bargain, moving the debate from “they’re getting their special deal, I want mine,” to “I’m losing my special deal, so they’d better lose theirs too.” While the current presidential front-runners are not championing economic growth, House Speaker Paul Ryan (R., Wis.) and other House members are. And if economic-policy leadership moves from a chaotic presidency to a well-run Congress, that may be healthy for America’s political system as well as for the economy.

Update: response to some criticis


  1. Social Security also needs to remove the incentive for states to shift people to the disability system. "Make states responsible for a large portion of disability claims just as they are for welfare, and the number of people collecting disability will collapse."
    For more, see

  2. The second camp solution (Fed rate in limbo -- the dance) is concrete enough to be done easily. The third camp solution -- cut regulation -- is too vague. Most regulations have purposes. Even the regulation that ate Manhattan (Dodd Frank) has a purpose. Many say Dodd Frank increases growth by improving stability in the financial sector. They would point the period of negative growth (2008) caused by instability in the financial sector.

    As one grump to another, here's a challenge: name specific regulations you think should be removed. If possible, point to a specific cost/benefit analysis. Thanks.

    1. Dodd Frank increases growth??? As someone who's been in finance and investment-related businesses for 25+ years, I'd argue strenuously that Dodd Frank, Sarbox and other gems have only increased the growth of the non-value-adding compliance industry, while dramatically increasing the costs of doing business and starting new businesses. Literally every person I know in finance or investment mgmt would agree.

    2. I agree with Mark. Sarbox also killed the old VC -> public model.

  3. I often wonder what the American economy would do if government got out of the way. Professor Cochrane correctly cites Federal govt in his post. However, what if the city of Chicago's govt got out of the way? The state of Illinois? The state of California? We not only have big federal govt problems, but we have state and local govt issues too.

    As an economist might put it, there is massive dead weight loss in the American economic system right now because of poor govt policy at the federal, state, county, and local level. How massive? Probably at least 2-3% points on GDP.

  4. No quarrel on the substance of JC's piece. But how to achieve positive change? That gets to our current abysmal process of rule making. In principle, Congress shall make laws; in practice, Congress has delegated substantive rule making to administrative agencies inside the executive branch. This is a constitutional abomination that the Supreme Court unfortunately has upheld. An op-ed is today's WSJ points out the anomaly of this. Congress grants rule making authority to an agency, the agency passes a rule, Congress explicitly overrides that ruling, but the President vetoes that override, and the rule stands because it takes two thirds of both houses to override the override. In effect, Congress has gummed itself up with its own rules, and the administrators now run amok with no political oversight except the President. This is the hallmark of the current Administration, witness how frequently it gets pulled back by the courts -- but not by Congress where the will of the people is supposed to be voiced. Thus, to effect positive change to the JC growth agenda, we need to get more political control over agency rule making. Process is often substance. Lawyers and pols know that. Most economists outside of public choice don't pay much attention to that fundamental adage.

  5. Agree less regulation would raise GDP. The cost of dumping radioactive waste into the Chicago River is cheaper than proper disposal and the cost of refrigeration for meat to keep the maggots at bay is passed to the consumer. If you can find a race of humans you do not consider to be people, their slave labor will raise GDP person. So this “Frontier” may not be the ideal place to live. So we elect representatives to manage these trade-offs. Are we at the optimal point along the curve? Assume not. Given we are close to the top of the curve, must be doing something right. Room for improvement? Of course. Seems like the solution is for responsible adults in politics to find and enact improvements without regard to re-election money. Unfortunately adult behavior is in short supply and money is plentiful. Safe to say that 535 up for re-election legislators will not do a better job of writing the details regulation. No grand solution ideas, benevolent monarch is out of the question. My ideal would be to have political leaders gather once a month and find identify the 10 dumbest regulations on the books and/or the 10 dumbest gaps in regulation not on the books and enact a change. These should be minor changes in the grand scheme of things. Repeat the process monthly. At the end of one presidential term we would have almost 5000 improvements. Guess what, that moves up and to the right on this curve. Thanks for sharing the article.

    1. OK, need to regulate the math requirement to post to the Internet... sorry about that: 5000=500

  6. States and localities have become enemies of growth too.

    Property zoning, and NIMBYism are suffocating whole regions and cities.

    Not a political issue btw: There is more effective antigrowth property zoning in GOP-centric Orange Co, CA, and than in donkish L.A. County.

    When it come to fashionable beachside communities, or single-family housing neighborhoods, no one believes in free markets.

    High-rise condos across the street!?

    Bring in the pinko-socialist zoning regulations!

    1. San Francisco feels like ground zero for all of this. All of my coworkers are bernie sander fans, despite earning salaries that put them a bracket or two short of the so called, "Evil Doers." SF housing prices and local policies are insane. I have wondered, more than once, why don't I just move to a new city free of these encumbrances. I have entertained this more than once, but inertia combined with a generally booming industry keeps my here. Still, I'm not anywhere near as inelastic as some economists believe.

  7. Excellent post. Particularly good that I just was talking and posted myself about the importance of growth and labor force participation (but not to this detail) So much time is spent with people promoting jealousy of others rather than growth and opportunity.

  8. The line through your chart is meaningless. You are fitting an exponential where there is no reason to think that the underlying function is an exponential (and NO, the data is not about growth of GDP, it is about the absolute level of GDP).

    Yes we could get some growth if we relaxed some rules - zoning comes to mind, as does project approvals, but the benefits of reducing occupational licensing seem marginal.

    That period of rapid growth you point to involved large public investments in research - some of it done in the 1940s for the war, some of it done in the fifties and sixties for the cold war and the space race. We also had large amounts of research being done that I view as quasi public that was being done by big monopolies: AT&T, IBM, Xerox (I say quasi public because the public was paying for the research through monopoly rents).

    If we want faster growth, public investment in research is probably the best way to go. It is what worked in the past - that and public investment in infrastructure.

  9. I would ignore most University of Chicago economist recommendations on fixing our current problems. As it was their economic solutions that got us here. Don't get me wrong; they were needed to combat out-of-control inflation. However, their policies have moved us to the opposite place where labor has little power and capital rules the day. Giving money more power, which is the Chicago way, will just make wealth inequality more pronounced; increase financial bubbles; create additional deflationary forces.

    1. Care to cite any of these Chicago school evil doers you speak of?

    2. I did not say they were evil. I said their policies favor capital over labor. Just as there are horses for courses, there is economist for times. It is not their time.

    3. I still don't get this. How do they favor capital over labor?

      Your comment seems to a reference to Piketty and others who view our problems as a direct result of wall street fat cats and clever financial engineering - and even here, Piketty got it wrong. Capital(which he doesn't really even define) is not the driver of inequality but wages themselves. In effect, its the labor of some that has exploded while the labor of others has not.

    4. What distinguishes capitalism from other economic systems is that private banks through their loan-making create 97% of the new public money. Where that capital (money) goes determines who benefits. When labor and government have the power, it goes towards investment, wages, etc. The risks there is inflation. When money (financial sector, bondholders, etc., the 1%) gets the power, new money flows towards financial assets. The risks here are inequality, political unrest (Brexit, Sanders, Trump, etc.), financial bubbles, and deflation.

    5. I thought money flowed to its most productive use. Flowing to financial assets tells only part of the story. Ultimately, real return comes from productivity - which is what those financial assets are based on; rather than just and endless cycle of inflating the price of financial contracts. Sometimes, it does go to wasteful expenditures, but government plays a heavy hand in this. Funneling money into subprime mortgages, horrible sovereign debt that gets used for bridges to nowhere are classic examples.

  10. I read a lot of economic blogs and your comment section has always seemed a little "off." I have a suspicion that many of these comments are bogus or paid for. Given the topics and level of discussion of your blog posts, the substance and tone of many of the comments don't match the comments of similar blogs. Or maybe you just really hit a nerve ;)

    1. I let people say what they want, subject to politeness limitations stated at the bottom of the post. Some other bloggers block comments from people they disagree with. I believe in free exchange of ideas -- and encourage commenters to point out silly statements.

    2. "many of these comments are bogus or paid for"

      What would constitute a "bogus" comment on the internet? I don;t think there is very much trolling that occurs in the comments here.

      My comments, at least, are not paid for and I don't think I have seen a comment on here that anyone would pay to have posted. :-)

      If the language is a little stilted at times it is because I, and I expect others, have learned to be respectful of Professor Cochrane's sensibilities. :-)

  11. Three questions from a CPA, not an economist.
    1. How are we going to unwind the Fed's balance sheet?
    2. How much growth is needed to be able to pay interest on the mass of debt the US has accumulated when and if interest rates ever get back to "normal" levels?
    3. What are "normal" interest rate levels. Reading one of Professor Hamilton's latest papers, I can't understand if there is a "normal" interest rate. At one time I thought it was inflation plus about 3%.

    1. 1. I hope we don't have to. Move the assets to short term treasuries, leave a big balance sheet.
      2. Surplus / debt = interest rate - growth rate. More growth is better.
      3. Inflation plus marginal product of capital - risk premium. The "right" price has been a quest of pundits and soothsayers for centuries.

  12. Unfortunately, I believe that we do need some regulation. Also more unfortunately, the governmental bodies have proven incapable of enforcing the regulations that we have. A good example of this ineptitude is that we do have strong immigration laws. Why aren't they enforced properly. We also have at least seven agencies watching over the financial industry. How did that work out for us? Not only was the government inept in monitoring the financial industry but the government created the environment that caused the Great Recession via their "house in every pot" policies whether people could afford the house or not.
    Good policies have to be passed before the slap on the wrist policies. A few decades ago Moynihan wanted to have the mentally disabled more integrated into communities, which would have set up local facilities to,provide health observation and job training. Instead, the government closed the federal hospital facilities that were housing and "treating" those people and threw the residents literally into the streets.
    Let's pass legislation that taxes all Bad products that are made in a labor or environmentally abusive manner to the level that makes them less competitive than Good products. This tax would be at the store front, i.e. what the consumer pays. This would require a product registration system with rules for what is abusive set up by the industry not the government. Maybe some oversight by a consumer protection committee. I didn't say this would be easy! We would also need taut reform with the ability to sue if negligence could be proven.
    if you make it you must make it you must leave the environment at least as good as you found it, hopefully better. This kind of clean business model would create more jobs in the clean business technology sector. Yes, this would cost more and the consumer would have to pay more for quality environmentally friendly products and maybe buy a lot less junk that puts more garbage into our landfills. However, before I insisted or passed regulation to mandate this I would insist on making sure the playing field was level for the Good products. They are our growth and our future.


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