Monday, November 21, 2016

Greenspan’s Grim Forecast For Growth

By Robert J. Samuelson 
The Washington Post
November 21, 2016

Alan Greenspan, the former chairman of the Federal Reserve, weighed in last week on one of the pressing issues facing the incoming Trump administration and the country — slow economic growth. Greenspan’s explanation is novel and bound to be controversial. To preview: He blames the welfare state and overall uncertainty for the slowdown.

Why should we listen to Greenspan? After all, wasn’t he the guy who brought us the 2008-2009 financial crisis? Well, no. Granted, he made huge errors, but so did many others. If Greenspan had become a professional musician, the financial crisis would still have occurred. And despite the crisis, Greenspan remains a highly original economic thinker.

“As an observer, analyst and forecaster, he was formidable,” writes Sebastian Mallaby, author of a critical but fair-minded biography of Greenspan. “He understood the interactions between [financial] markets and the real economy better than most of his contemporaries.” (Full disclosure: Mallaby is a contributing columnist for The Post.)

Economic growth matters greatly. Faster growth raises people’s incomes, while also increasing government’s tax revenues. Unfortunately, as is well known, growth has disappointed. Since 2010, it has averaged about 2 percent annually, significantly below the 3 percent average since World War II and half of Donald Trump’s 4 percent goal.

Some of the slowdown reflects baby boomers’ retirement; the labor force isn’t shrinking but is expanding more slowly than in earlier years. To offset this drag, we need higher productivity — more efficiencies and valuable products — to raise output. Instead, productivity growth has collapsed.

The following table, based on data from the Bureau of Labor Statistics, shows average annual productivity gains for four periods since 1950.

Annual Productivity Gains

1950-1970: 2.6 percent
1970-1990: 1.5 percent
1990-2010: 1.9 percent
2010-2015: 0.4 percent


As you can see, productivity gains since 2010 have virtually disappeared. At this rate, incomes would double every 180 years. By contrast, they’d double in 36 years if annual productivity increases averaged 2 percent.

Economists intensely debate what has caused this productivity eclipse. Robert Gordon of Northwestern University argues that major technological breakthroughs lie behind us. Others have cited too much government regulation, the hangover from the Great Recession (making companies and consumers more cautious), or mismeasurement (meaning that the true value of the Internet is understated).

By scouring economic statistics, Greenspan thinks he’s discovered heretofore hidden relationships that explain weak productivity growth.

What’s happening, he said recently at the conservative American Enterprise Institute, is that spending on “entitlements” (Social Security, Medicare, food stamps and the like) is crowding out gross national saving. Since 1965, saving has dropped from 25 percent of the economy (gross domestic product) to about 18 percent of GDP. Meanwhile, entitlement costs went from 5 percent of GDP to 15 percent.

“Entitlements” are what others call the welfare state. If we save less, we’re likely to invest less — so goes the argument — because domestic savings are the largest source of funds for business capital spending. Less investment then reduces productivity growth, because new investments typically embody the most efficient technologies.

That’s the Greenspan thesis in a nutshell: Entitlements are draining funds from productivity-enhancing investments.

To be sure, there are caveats. Greenspan concedes that foreign investment in the United States offsets some of the drop in U.S. savings. But he thinks this is waning. What also depresses investment, he argues, is a lack of confidence in the future — pessimism he blames on costly government regulations (he mentions Dodd-Frank) and large unknowns (say, global warming).

So twin pressures curb new investment: higher interest rates caused by borrowing to pay for entitlements; and cautious companies that exhibit “a remarkably weak interest in investing in the longer run.” They’ll invest in new software but not in long-lasting projects. Think factories, hospitals and hotels.

Even Greenspan notes that his theory is politically and intellectually challenged. No one — including, it seems, President-elect Trump — wants to cut entitlements. Moreover, the long stretch of low interest rates makes it hard for most people to believe investment has been crowded out, he says. (For policy wonks, Greenspan contends that the higher rates show up as an increased “spread” between rates on five-year Treasury notes and 30-year bonds.)

What other economists will think remains to be seen. An obvious question is whether Greenspan’s relationships are correlations, not cause and effect.

Still, there is at least one bit of good news. The forces that move productivity are so complicated — not just investment, but manager and worker skills, research and development, competitive markets and much more — that economists have consistently failed to predict major turns, up or down. The next surprise could be an upturn.

If not, the implications are sobering. As Greenspan put it: “What we are dealing with . . . is a huge problem which, as far as I can see, is almost insurmountable.” It’s hard to disagree.


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