My last three posts, here, here, and here address America’s slow economic growth for the past 15 years and why it is such a serious problem. Today I begin to discuss how we can turn this around.
In today’s Wall Street Journal, the economist John Cochrane has a very informative Op Ed, “Ending America’s Slow-Growth Tailspin” which describes a clear path to speed up economic growth. Says Mr. Cochrane:
From 1950 – 2000 the U.S. economy grew at an average rate of 3.5% annually. Since 2000 it has grown at only half this rate, 1.76% annually. By 2008 the average American was more than three times better off than in 1952. Real GDP per person grew from $16,000 to $49,000 during this time period.
There are three main theories as to why growth is slowing down.
We’ve run out of new ideas. Get used to it and start fighting over the shrinking pie.
The culprit is “secular stagnation” which the Federal Reserve is unsuccessfully trying to overcome with low interest rates and quantitative easing. The only other solution is vast new stimulus spending.
The U.S. economy is overrun by an out-of-control and increasingly politicized regulatory state. America is middle-aged and overweight. The solution is to eat better and exercise.
The first two camps are doubtful that better policies will produce faster growth. But the examples of North Korea vs South Korea and East Germany vs West Germany show that government policy matters for economic growth. In fact Mr. Cochrane’s chart (above) shows how a country’s “ease of doing business” score, compiled by the World Bank, correlates with increased average income. Even though the U.S. is near the top by this measure, there is still plenty of room for improvement.
In my next post I will delineate specifically how to streamline our oversized regulatory state. In the meantime, take a look at Mr. Cochrane’s article in today’s WSJ.
In connection with the annual World Economic Forum in Davos Switzerland, the World Bank has published a breakdown of income growth around the world, as reported yesterday by the Wall Street Journal in the article “Two-Track Future Imperils Global Growth”. The key finding, as shown in the chart below, is that it is precisely the middle class in the developed nations which saw the slowest income growth in the years from 1998-2008. It is clear from this chart what is going on around the world. The top 1% makes its money from capital investments and historically the return on capital exceeds economic growth. The next 9% are both the skilled workers and the educated professionals who are benefitting from the growth of knowledge industry. The medium skilled middle class in the developed world, from the 75th percentile through the 90th percentiles, are the ones who are seeing the smallest income gains. Their jobs are being eliminated by the force of globalization which is shifting lower skilled work to lower paid workers in the developing world.
The article points out, consistent with the above chart, that the income, including benefits, of the poorest 50% in the U.S. grew 23% in this same time period. So it really is the middle class which is hurting the most in the U.S. There are three basic ways of addressing this problem:
The federal government can help by taking much stronger measures to boost the economy thereby creating more jobs as well as higher paying jobs. Tax reform, trade expansion, immigration reform and fiscal stability are what is needed to get this job done.
The states can help by improving our K-12 education system to make sure that everyone acquires the basic academic skills, such as reading and math, which they will need to achieve their highest potential in life.
All concerned and aware individuals (such as ourselves!) must constantly beat the drums to encourage young people to stay in school and take learning seriously.
America is “exceptional” because it is the strongest, freest, and wealthiest country the world has ever known. But our future success is by no means guaranteed. We have to constantly work for it and earn it!