The other Smith on Growth

In a recent Bloomberg piece, "Growth Fantasy of Tax Cuts and Small Government" Noah Smith took on my recent blog posts on 4% growth. In the first, I outlined the historical evidence that yes, the US has grown at 4% quite often. In the second, I outlined the standard smorgasbord of free-market policies which I suggested would increase our growth, at lest by inducing a substantial level shift.

Noah's main point is that in my blog posts I did not make any substantive quantitative claims that moving our country from the Republic of Paperwork to Adamsmithia would return the US to the kind of growth we saw in the 60s, late 80s and 90s. True enough.

My surprise in reading Noah is that he provided no alternative numbers and no alternative policies.  Well, if you don't think Free Market Nirvana will have 4% growth, at least for a decade as we remove all the level inefficiencies, how much do you think it will produce, and how solid is that evidence? He rambled a bit about the predictive value of some state scoring efforts, but that's all quite beside the central point -- how much growth could the best imaginable economic policy, at a national level, produce?

More deeply, Noah suggests no alternative policies. He does not claim that more government wage controls,  unions, stricter labor laws (Uber drivers must be employees) heavier and more politicized regulation, cartelizing more industries beyond health and finance, raising taxes to confiscatory levels, larger welfare state, boondoggle public works and so on -- the alternative path in the current policy debate -- will get us back to 4% growth.

So, one must only conclude that Noah -- and others voicing the same it's-not-possible complaint -- believes 4% growth is not possible. 2% or less is the new normal. Sustained growth, of the sort that made us all healthier and wealthier, if not wiser, than our grandparents, is a thing of the past. So all we can do now is fight to carve up a shrinking pie, retreat from an increasingly chaotic world, and pretend that carving up the pie will not shrink it further.

I am surprised at this pessimism, both economic and political. If the absolute best economic policies anyone can imagine -- and, again, Noah offered no alternatives -- cannot return us to 4% growth and sustain that growth, why bother being economists? They do not call us the "dismal science" because we think the current world is close to the best of all possible ones, and all there is to do is haggle over technical amendments to rule 134.532 subparagraph a and hope to squeeze out 0.001% more growth. Usually, the role of economists is to see the great possibilities that every day experience does not reveal. ("Dismal" only refers to the fact that good economics respects budget constraints.)

Similarly, the next US presidential election looks to be an argument over growth vs. redistribution. I doubt that many Americans are so willing to abandon hope so soon.  Even Hilary Clinton's latest speech took the view that reducing inequality would raise growth -- a novel argument (relative to 250 years since Adam Smith) that invites similar theoretical and quantitative evaluation, but at least one that does not give up on growth.

Noah's tired pot-shot has been going on a long time. In 1980 Ronald Reagan announced some pretty radical growth-oriented policies, at least by the standards of the time. (Not much new since Adam Smith, of course.) The standard liberal commentators made the standard objections: voodoo economics, numbers don't add up, it will take generations of unemployment to lower inflation, the debt will explode, and so forth. (Plus, the Soviet Union will be there forever, we might as well get along.)  Reagan offered optimism; won, malaise ended, we won the cold war, and there was an economic boom. One would think the tired argument would have less force by now, or that the pessimists would have found a better one.

4% growth

I wrote last week on the simple factual question of whether and how often the US has experienced 4% real GDP growth in the past.

The deeper question, is that growth possible again? I answered yes, it's surely possible as a matter of economics. 

A few have asked me "why do so many of your colleagues disagree?" It's a question I hate. It's hard enough to understand the economy, I don't pretend to understand how others respond to media inquiries. And I don't like the invitation to squabble in public. 

It has taken me some time to reflect on it, though, and I think I have a useful answer. I think we actually agree.

As I read through the many economists' quotes in the media, I don't think there is in fact substantial disagreement on the economic question -- is it economically possible for the U.S. to grow at 4% for a decade or more? Their caution is political. They don't think that any of the announced candidates (at least with a prayer of being elected) will advocate, let alone get enacted, a set of policies sufficiently radical to raise growth that much. 

This is a sensible position. When I answer the question, is 4% growth for a decade economically possible, my answer is whether the most extreme pro-growth policies would yield at least that result. A  short list:

Sequester, growth, and the deflation that did not bark.

Multiplier? What multiplier? 

Wall Street Journal, November 26 2014:

The economy expanded at its fastest pace in more than a decade during the spring and summer,... Gross domestic product...grew at a seasonally adjusted annual rate of 3.9% in the third quarter... combined growth rate in the second and third quarters at 4.25%, affirming the best six-month pace since the second half of 2003." 

The upward revision to overall growth, driven by [sic] stronger consumer and business spending and a smaller drag from inventory investment, surprised economists... 

Paul Krugman, February 22 2013, "Sequester of Fools"

The sequester, by contrast, will probably cost “only” around 700,000 jobs.

New York Times, Februrary 21 2013, "Why Taxes Have to Go Up"

Democrats and Republicans remain at odds on how to avoid a round of budget cuts so deep and arbitrary that to allow them now could push the economy back into recession. The cuts, known as a sequester, will kick in March 1 [my emphasis]

FDA and the costs of regulation

The Wall Street Journal has had two recent articles on the FDA, "Why your phone isn't as smart as it could be" by Scott Gottlieb and Coleen Klasmeier on how FDA regulation is stopping health apps on your iphone, and Alex Tabarrok's review of "Innovation breakdown," the sad story of MelaFind, a device that takes pictures of your skin and a computer then flags potential cancers. The FAA's ban on commercial use of drones is another good current example.

One of our constant debates is how much regulation or the threat of regulation is slowing economic growth.  Over the weekend, for example, Paul Krugman, finding the New York Times itself too soft on libertarians,

S&P economists and inequality

Neil Irwin at the New York Times writes interesting coverage of a report titled "How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide" by S&P economists.

The article starts with interesting comments about business economists

...you have to know a little bit about the many tribes within the world of economics. There are the academic economists...many labor in the halls of academia for decades writing carefully vetted articles for academic journals that are rigorous as can be but are read by, to a first approximation, no one. 

Ouch!

Renewing Prosperity, The Op-Ed

For its 125th anniversary issue, the WSJ asked "If you could propose one change in American policy, society or culture to revive prosperity and self-confidence, what would it be and why?" Oh, and you have 250 words. I asked my son what to do. He answered quickly, "wish for more wishes." That's pretty much what I did.

My answer, along with some great other essays here at the WSJ. (WSJ asks us to hold off reposting for 30 days, which is why it's here now.)

Limit Government and Restore the Rule of Law

America doesn't need big new economic ideas to get going again. We need to address the hundreds of little common-sense economic problems that everyone agrees need to be fixed. Achieving that goal requires the revival of an old political idea: limited government and the rule of law.

Our tax code is a mess. The budget is a mess. Immigration is a mess. Energy policy is a mess. Much law is a mess. The schools are awful. Boondoggles abound. We still pay farmers not to grow crops. Social programs make work unproductive for many. ObamaCare and Dodd-Frank are monstrous messes. These are self-inflicted wounds, not external problems.

Why are we so stuck? To blame "gridlock," "partisanship" or "obstructionism" for political immobility is as pointless as blaming "greed" for economic problems.

Washington is stuck because that serves its interests. Long laws and vague regulations amount to arbitrary power. The administration uses this power to buy off allies and to silence opponents. Big businesses, public-employee unions and the well-connected get subsidies and protection, in return for political support. And silence: No insurance company will speak out against ObamaCare or the Department of Health and Human Services. No bank will speak out against Dodd-Frank or the Securities and Exchange Commission. Agencies from the Environmental Protection Agency to the Internal Revenue Service wait in the wings to punish the unwary.

This is crony capitalism, far worse than bureaucratic socialism in many ways, and far more effective for generating money and political power. But it suffocates innovation and competition, the wellsprings of growth.

Not just our robust economy, but 250 years of hard-won liberty are at stake. Yes, courts, media and a few brave politicians can fight it. But in the end, only an outraged electorate will bring change—and growth.

Macro debates, the oped

This is a a Wall Street Journal Op-Ed, on supply vs, demand in understanding slow growth. WSJ asks that I don't re-post the oped for a month; a month has passed so here it is for those of you who don't subscribe to WSJ.

The underlying paper is The New Keynesian Liquidity Trap, for those wanting more substance to some of the claims about New Keynesian models.

They didn't want the graph, but I think it illustrates the point well.

The Op-Ed, [with a few cuts restored and one typo fixed]:

Output per capita fell almost 10 percentage points below trend in the 2008 recession. It has since grown at less than 1.5%, and lost more ground relative to trend. Cumulative losses are many trillions of dollars, and growing. And the latest GDP report disappoints again, declining in the first quarter.

Sclerotic growth trumps every other economic problem. Without strong growth, our children and grandchildren will not see the great rise in health and living standards that we enjoy relative to our parents and grandparents. Without growth, our government's already questionable ability to pay for health care, retirement and its debt evaporate. Without growth, the lot of the unfortunate will not improve. Without growth, U.S. military strength and our influence abroad must fade.

Summer Institute

I just got back from the NBER Summer Institute. The Economic Fluctuations and Growth meeting organized by Larry Christiano and Chad Jones sparks some thoughts on where macro is and where we're going. (I also attended the monetary economics and asset pricing meetings, which were excellent and thought provoking too, but one can only blog so much.)

Review:

One idea for renewing prosperity

For its 125th anniversary issue, the WSJ asked "If you could propose one change in American policy, society or culture to revive prosperity and self-confidence, what would it be and why?" Oh, and you have 250 words.

My answer, along with some great other essays here at the WSJ as "Ideas for Renewing American Prosperity."

I asked my son what to do. He answered quickly, "wish for more wishes." That's pretty much what I did.

Macro debates

A Wall Street Journal Op-Ed, on supply vs, demand in understanding slow growth.

The underlying paper is The New Keynesian Liquidity Trap, for those wanting more substance to some of the claims about New Keynesian models.

They didn't want the graph, but I think it illustrates the point well.

Please follow the link for the oped itself.

Deflation Skeptics

Michele Boldrin, Giovanni Federico and  Giulio Zanella have an excellent essay on noisefromamerika, Should we worry about deflation? Maybe yes, maybe no. (If your Italian is rusty, Google translate does a fine job with it.) This matters of course, as deflation is the great European preoccupation at the moment.

They remind us that, although deflation was correlated with the Great Depression in the US and some other countries,

Source: noisefromamerika.org. "PIL" is GDP

that correlation is not universal. For example, in the late 19th century, deflation coincided with strong growth,

What's the difference?

Summers on Stagnation

Larry Summers has published a very interesting speech, U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound. I heard a version of the same thoughts last October, at the joint Brookings-Hoover conference "The U.S. Financial System—Five Years After the Crisis."

I was struck then, as I am now, at how much consensus there is among macroeconomists. Yes, you heard it here. And Larry expresses it elegantly, as you might expect. While the press talks about recovery, macroeconomists look at output growth and employment and it still looks pretty dismal.

Declining expectations

Philadelphia Fed President Charles Plosser made this nice graph, showing how reduced views of potential GDP are closing the gap, not rises in actual GDP. The source is a nice speech here.  This fits in the recent series of blog posts on forecasts and slump. By contrast, here is the last big recession, where GDP closed the "gap."

Weekend Labor Markets

This weekend produced several interesting readings on the state of labor markets.

1. Glenn Hubbard,

In the Wall Street Journal on "The Unemployment Puzzle: Where Have All the Workers Gone?" Like economists of all stripes, the fact that the unemployment rate -- the fraction of people looking for jobs -- is down masks the deeper problem, that so many people are not working and not looking.

Glenn sets out well the basic question:

Larry Summers' Martin Feldstein Speech

The latest NBER Reporter has the speech Larry Summers gave at the annual NBER "summer camp" for economists. As you would expect, there are some really interesting bits, which provoked a good lunchroom discussion. To my mind it (and this blog post) gets much better toward the end.

The organizing thread is Larry's worries about long term trends in employment and income distribution, and how trends in productivity and innovation affect it. If the word did not have negative connotations, I might term the talk "neo-Luddite," the worry that this time, unlike all the others, technical change, primarily information technology, will be really bad for workers.

Ouch. "Unemployment" figures in the popular press, but it is the fraction of people actively looking for jobs. The far bigger worry among many economists is the rise in "non-employment." One in ten men, 25-50, are simply not working at all or even looking for work.

Richmond Fed Interview

The Richmond Fed published a long interview with me in their Econ Focus, shorter pdf (print) version here and longer web version here. Some of the questions:

• Does the 2010 Dodd-Frank regulatory reform act meaningfully address runs on shadow banking?
• So what do you think is the most promising way to meaningfully end "too big to fail"?
• Do you think there's any reason to believe recessions following financial crises should necessarily be longer and more severe, as Carmen Reinhart and Kenneth Rogoff have famously suggested?
• Many people have asked whether the finance industry has gotten too big. How should we think about that?
• What are your thoughts on quantitative easing (QE) — the Fed's massive purchases of Treasuries and other assets to push down long-term interest rates — both on its effectiveness and on the fear that it's going to lead to hyperinflation?
• Both fiscal and monetary policies have been on extreme courses recently. What are your thoughts on how they might affect each other as they move back to normal levels?
• Switching gears to finance specifically, what do you think are some of the big unanswered questions for research?
• You wrote an op-ed on an "alternative maximum tax." What’s the idea there?
• Can transfers really help the bottom half of the income distribution?
• Which economists have influenced you the most?

You'll have to click to the interview for answers!

Thanks to Aaron Steelman, Lisa Kenney and especially  Renee Haltom, who helped a lot with the editing. I'm a lot less coherent in person!

Job market doldrums

Three recent views on the dismal labor market pose an interesting contrast.

Alan Blinder wrote a provocative WSJ piece on 6/11, Fiscal Fixes for the Jobless Recovery. A week prviously, 6/5, Ed Lazear wrote about The Hidden Jobless Disaster. And John Taylor has a good short blog post Job Growth–Barely Keeping Pace with Population

All three authors emphasize that the unemployment rate is a poor measure of the labor market. Unemployment counts people who don't have a job but are actively looking for one. People who give up and leave the labor force don't count. Employment is a more interesting number, and the employment-population ratio a better summary statistic than the unemployment rate. After all, if unemployment falls because everyone who is looking for a job gives up, I don't think we'd see that as a good sign.

Source: Wall Street Journal

Ed Lazear made this interesting chart. As he explains,

Debt and growth in 10 minutes

This is a short video from last year. I only just found out it exists. It still seems pretty topical, and (for once) condensed because Lars Hansen really forced me to obey the 10 minute time limit!

There is a better link here from the BFI page here that covers the whole event, but I couldn't figure out how to embed those.

Fun debt graphs

I was having a bit of fun making graphs for a talk. Are we all fine and debt is no longer a problem? I went back for a closer look at the CBO's long term budget outlook and The budget and economic outlook 2013 to 2023. All numbers from these sources.

Growth in the UK?

I thought European "austerity," meaning mostly large increases in marginal tax rates on anyone daring  to work, save, invest, start a company or hire people, while spending stays north of 50% of GDP, was a pretty bad idea.

So I was glad to read the tiltle, when a friend sent me a link to the Telegraph, announcing Osborne to unleash raft of policies to kick-start growth. Great, I thought, after trying everything else, the British will finally try the one thing that will work.