📈 Yes, the US can have a 3% growth economy again
Also: 5 Quick Questions for . . . economist Michael Strain
"If we did all the things we are capable of, we would literally astound ourselves." - Thomas Edison
In This Issue
Long Read: Will the 2021 Biden Blip turn into a 2020s Boom?
5QQ: 5 Quick Questions for . . . economist Michael Strain
Micro Reads: Space-based solar; mRNA vaccines; Kim Stanley Robinson, and more …
📈 Will the 2021 Biden Blip turn into a 2020s Boom?
The last time the US economy grew as crazy fast as it did in 2021 — a red-hot 5.7 percent for the year, adjusted for inflation — was back in 1984 when it expanded at a white-hot 7.2 percent pace. So, some really good economic news coming out of the Commerce Department last Friday. President Biden’s supporters, in particular, were pretty pumped. The mayor of Long Beach City, Calif., for instance:
Of course, the president himself also touted the superstrong report:
Biden, unlike many Democrats, did not use the word “boom.” That was probably intentional. Although the economy grew at an extremely rapid pace, that growth was accompanied by highest inflation in four decades, hurting take-home pay. For example: Real average hourly earnings decreased 2.4 percent, seasonally adjusted, from December 2020 to December 2021, the Labor Department said a couple of weeks ago.
But now what? Can the 2021 acceleration turn from a short-term blip to a sustained expansion of such strength and broad benefit that it’s worthy of being called a “boom”?
For starters, 2022 seems almost certain to be a year of deceleration, even as the economic aftershocks of the pandemic fade. There will be no more mega-stimulus bills and the Federal Reserve is beginning a quest to tamp down inflation. “With the economy now close to potential and both fiscal and monetary policy being tightened, that underlines our view that growth will be a below-consensus 2.7% for 2022,” the consultancy Capital Economics told its clients last week.
After that, the consensus declares, even more deceleration as the economy returns — all else equal — to its long-term growth path. (This assumes Fed rates hikes don’t throw us into a recession.) Goldman Sachs looks for real GDP growth, year over year, of 2.2 percent in 2023, 2.2 percent in 2024, and 2.3 percent in 2025. The latest Federal Reserve median forecast is for 2.2 percent in 2023, 2.0 percent in 2024, and then the forecast shifts to its long-run expectation of 1.8 percent.
Why are these longer-range forecasts so thoroughly unspectacular? After all, real GDP growth averaged about 3 percent from 1950 through 2019. Likewise, after the boomy year of 1984, the economy also grew at about 3 percent up until the Global Financial Crisis — a multi-decade long boom of almost continuous growth. So, wouldn’t a reasonable expectation for the post-pandemic economy be something like 3 percent-ish?
Not really. As the below chart shows, the long-run decline in labor force growth — due to declining fertility rates and decreasing immigration — has made it particularly difficult to generate fast economic growth. To hit even 3 percent real GDP will require much heavier lifting from worker productivity growth, which downshifted right before the GFC (after upshifting in the 1990s).
It would be no small thing to get faster productivity growth. As I have mentioned previously, Erik Brynjolfsson, a Stanford economist who specializes in the digital economy, thinks it’s possible productivity growth could average close to 2 percent this decade. Part of his optimism stems from the accelerated adoption of digital technologies during the pandemic. Then there’s the slow diffusion of AI:
Recent breakthroughs in machine learning will boost productivity in areas as diverse as biotech and medicine, energy technologies, retailing, finance, manufacturing and professional services. . . . The productivity benefits of general-purpose technologies typically take years to show up in the official statistics. In fact, productivity is initially suppressed as organizations invest time and effort creating intangible assets like new business processes, new skills, new goods and new services. However later, these investments are harvested, boosting productivity. The result is a productivity J-curve. Recent research indicates that we are approaching the rising part of the productivity J-curve for the AI and related technologies.
Let’s say Brynjolfsson is correct. It might mean the difference between an economy growing a bit above 2 percent versus one a bit below. That’s not insignificant. When you’re dealing with a $23 trillion American economy, every tenth of a percentage point matters. That said, I think it’s a legitimate national goal to try and grow the economy as fast in the future as we have in the past. Tough? Sure. Impossible? I don’t think so.
Let me refer to a fascinating 2017 Peterson Institute analysis authored by Lee Branstetter of Carnegie Mellon University and Daniel Sichel of Wellesley. The economists tried to gauge potential productivity impact of various technological developments, as well as factoring in the possibility that government stats were understate tech progress. Their conclusion (also displayed in the below graphic):
The pace of innovation in IT and the strength of business investment are far greater than official statistics suggest. Prospects for significant innovation in healthcare and education are strong, and robots are likely to become increasingly important throughout the economy. The ongoing globalization of R&D could provide essential underpinnings for an acceleration of productivity growth, even in the longer run. A standard productivity growth accounting framework captures these factors to highlight how a significant revival of productivity growth could emerge, especially in the medium to long run. A pace of 2¼ percent a year is eminently plausible—and there are solid reasons to hope for even more rapid productivity growth.
I don’t want to get too hung up in numbers vs. directionality, especially given the controversy over whether the productivity of the digital economy is being properly measured. But Branstetter and Sichel are not alone. Economist and techno-optimist Joel Mokyr of Northwestern University says the contribution of IT to our well-being is not evident from the productivity stats because the way “we measure GDP and productivity growth is well designed for the wheat-and-steel economy.” Additionally, I would note that Goldman Sachs thinks the the pace of annual real GDP growth is understated, by by around 1.0 percentage points currently, up from 0.5 in 2005 and 0.3 in 1995. That said, the point here is not about hitting a particular number or level, but rather acceleration.
Now here’s a skeptical take from JPMorgan that’s worth highlighting:
Predicting when these technologies [such as AI, robotics, or autonomous vehicles] will become commercially viable is tricky; predictions of the commercial roll-out of fully autonomous vehicles have been notoriously unreliable. But in almost all cases making a technology economically viable requires investment, not only in R&D but also in the new equipment that usually embodies the newer vintages of technology. Productivity booms tend to coincide with investment booms. Until business investment steps up more meaningfully, the odds remain low that productivity growth will shift higher.
That last bit about “business investment” is important. While some parts of the Biden agenda have been pro-productivity growth, such as the infrastructure bill, there’s been too little talk about the role of the private sector in pushing forward the economy — and how government can help. Yes, infrastructure matters. Federal R&D matters. But taxes matter and regulation matter, too. (Too often EconTwitter treats those latter two as afterthoughts.) Washington needs to look at the range of public policies — which I highlight frequently in this newsletter — through a growth and innovation lens if this blip is going to turn into another long boom.
❓❓❓❓❓ 5 Quick Questions for . . . economist Michael Strain
Michael Strain is the director of Economic Policy Studies, and the Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute, where he oversees the institute’s work in economic policy, financial markets, international trade and finance, tax and budget policy, welfare economics, health care policy, and related areas. Dr. Strain is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).” Before joining AEI, Strain worked in the Center for Economic Studies at the US Census Bureau and in the macroeconomics research group at the Federal Reserve Bank of New York.
1/ What would you want a reporter to know before writing a story about the “Great Resignation” or a reader to know before reading such a piece?
Four things: The first is that resignations are certainly extremely elevated. But it’s also the case that more people are being hired each month than in any month prior to the pandemic. The second is that people’s decisions about job opportunities depend on their circumstances. When savings account balances — swollen thanks to generous pandemic support from government programs — come back to earth, many of these “bad jobs” will look a lot better. Third, I am worried that labor demand will cool before many workers who are currently on the sidelines come back to work. Workers who are waiting for the perfect job — enabled to do so in part by swollen savings accounts — might find it difficult to secure any job if they wait too long. Finally, I am concerned about the tenor of this debate. Lower-wage service-sector jobs give people the opportunity to make meaningful contributions to society. That work has inherent dignity. Opinion leaders are both wrong and doing the nation a disservice when they degrade those jobs.
2/ How much of a threat does the recent inflation surge pose to the current expansion?
It poses a substantial risk to the longevity of the current expansion. The odds of inflation causing a recession either through a slowdown in consumer spending or policy mistake by the Federal Reserve are jointly troublingly high.
3/ Do you think the advances in AI and robots could result in higher unemployment or lower labor force participation than we’ve seen historically?
I don’t think these advances should have a lasting impact on unemployment, but I am concerned about their effect on workforce participation. These advances are coming whether we want them to or not — and I want them to — so the task for public policy is to make sure that people have the skills to compete in the labor market of the future.
4/ What economic view or opinion of yours has been changed/altered by the pandemic?
Positive: Businesses have been much more creative and resilient than I would have thought. The absence of a large increase in business failures — even given the Paycheck Protection Program and generous household income support — has been surprising. Negative: People in some parts of the United States are much more risk averse than I would have thought. Keeping children out of classrooms for as long as we have in some places is an economic calamity and a moral outrage.
5/ What film, TV show, book, or video game does a particularly good job at showing a future you might want to live in?
The closest for me is probably Star Trek: Deep Space Nine.
☀ Space-based solar power beckons as a new frontier for humanity - Anjana Ahuja, Financial Times | More than 80 years after Isaac Asimov first proposed that solar energy could be captured in space, converted to microwave radiation, and beamed down for use, both the UK and US are exploring the possibilities of space-based solar power as a clean, abundant, and technically workable source by 2040. A UK government report: “There is 100 times more solar energy available from a narrow strip around the earth at Geostationary Earth Orbit than the forecast global energy demands of humanity in 2050.” A US analysis call SSP “another arrow in the quiver to address climate change” China aims to build the first SSP by 2035. The US military has a $100m project planned for launch in 2025. “Arachne“ would deliver SSP to remote military bases, eliminating attacks on fuel convoys and supply lines.
🧬 The next act for messenger RNA could be bigger than covid vaccines - Antonio Regalado, MIT Tech Review | Beyond potentially ending the COVID-19 pandemic, messenger RNA may offer a new approach to manufacturing drugs. Shots could deliver temporary instructions into cells to prevent herpes, malaria, flu, and coronavirus mutations. But it’s also possible the technology will create cheap gene fixes for cancer, sickle-cell disease, RSV, and maybe even HIV. As one researchers puts it: “We could correct sickle-cell with a single shot. We think that is groundbreaking new therapy.”
🌌 Can Science Fiction Wake Us Up to Our Climate Reality? - Jonathan Rothman, The New Yorker | This profile of bestselling sci-fi author Kim Stanley Robinson touches on the importance of how the future is portrayed in popular fiction. While Robinson's works include themes like post-capitalism and ecological disaster, he's no dour personality and his novels embody his "anti-anti-utopianism." Blurring the lines between Thunbergian climate catastrophism and Muskian optimism, Robinson's sci-fi both speculates on possible futures and comments on the currents of the present day, while acknowledging the human capacity to adapt, innovate, and respond to new challenges. Rothman: "[Robinson] does believe that there is a future—an unknown place yet to be explored. He thinks that attitudes shift, that progress exists, that necessity drives invention; but also that progress is slow and easily reversed, that money talks, and that disorder is the norm."
🚜 The Slowdown in Agricultural Productivity Growth - Timothy Taylor, The Conversable Economist | While agricultural productivity growth remains strong in the developed world, developing economies face declining productivity growth in their agricultural sectors. Sub-Saharan Africa, where subsistence farming is much more common than in the developed world, experienced declining agricultural productivity in the 2010s. One might expect the reverse: faster productivity growth in developing economies with lots of room to grow and slower productivity growth in the developed world where the low-hanging fruit has already been picked. But whatever the reason for sluggish agricultural productivity growth in lower-income countries, there is a pressing need to improve agricultural output.
🔮 Let’s make the future what it used to be - James Pethokoukis, The Boston Globe |
The lifesaving mRNA vaccines are hardly the only important scientific and technological advances to have emerged during the COVID-19 pandemic. Among the others: cheap, reusable rockets that returned the United States to manned space flight; an AI program that can accurately predict the structures of proteins needed to create new drugs and medical treatments; stunning developments in nuclear fusion, especially at an MIT spin-off company; CRISPR genetic editing deployed in the human body for the first time; and the launch of NASA missions to test asteroid deflection. At a minimum, all that progress in key sectors such as biology, computer science, energy, and space suggests it isn’t crazy to think this decade may eventually be worthy of the “New Roaring 20s” sobriquet that’s already been bandied about on Wall Street. More significantly, however, America may be leading the world in finally realizing the expansive techno-optimistic visions of postwar futurists.
✈ Jetpack racing could join this year's Air Race World Championship - Loz Blain, New Atlas |
💨 The Quest to Trap Carbon in Stone—and Beat Climate Change - Vince Beiser, Wired |
🛣 The US plans to reduce roadway deaths with smarter road design - Aarian Marshall, Ars Technica |
💻 Will China dominate the world of semiconductors? - The Economist |
🔗 China Can’t Afford to Decouple from the West - Minxin Pei, Bloomberg |
Part of the productivity shortfall is a function of measurement error. But that is not enough.
I personally think we can see growth in excess of 2%, if not 4% for long durations. It is not a function of invention. Its a function of resource allocation.
There is a nearly infinite source of latent demand - or unmet needs in society. Things we need to solve. "Data Driven" systems make it easier to detect this latent demand. Innovation is the nexus of customer need and invention. Entrepreneurs see the need and match the invention to the need. To increase GDP we need to improve the coordination of these resources (Latent demand, talent, capital).
Centralize resource allocation fails to grasp the nuances of market signals. As companies get bigger and centralize decision making they lose that signal. They get scale, which has a value, but they lose their ability to detect opportunity.
Dispersed resource allocation, devoid of rent seeking, and close to customers accelerates the matching of markets to technology. Increase data driven systems that eliminate information arbitrage should accelerate productivity.
In the 50s and 60s we saw a great deal of GDP growth in the US, because just about every state in the union had talent (post WWII) and capital (local banks). The US is unique in its zeal for creative destruction. A combination of network driven information discovery and dispersion of decision making should energize a long boom. Creating new products and industries we have yet to imagine.