Tag Archives: labor participation rate

How to Get Our Economy Back On Track

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My last several posts have expressed dissatisfaction with both presidential candidates and the hope that whoever wins in November (very likely Hillary Clinton) will work with the Republican House of Representatives to implement its “A Better Way” plan for national renewal.
In particular, faster economic growth would produce more jobs and better paying jobs and hence is highly desirable.  As many people, including myself,  have pointed out, it is low productivity growth caused by low business investment, which is largely responsible for slow economic growth.
The economist John Taylor has an excellent analysis of this problem.  He points out that the rate of economic growth equals the growth of labor productivity plus the growth of employment.

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He then shows that:

  • Productivity growth slowed from the mid-1960s until the early 1980s, then increased until the mid-2000s, and has slowed way down in the past ten years.
  • The labor force participation rate has dropped dramatically since the Great Recession but only a small part of this drop off was caused by demographic trends (i.e. more retirees).

    capture72Such relatively long cycles of productivity growth and decline (longer than normal business cycles) suggests that government policy is having a major effect on economic performance. According to Mr. Taylor, what is needed is:

  • Tax reform to lower tax rates to improve incentives for work and investment.
  • Regulatory reform to prevent regulations which fail cost-benefit tests.
  • Free trade agreements to open markets.
  • Entitlement reforms to prevent a debt explosion.
  • Monetary reform to restore predictability in financial markets.

Conclusion. Mr. Taylor makes a very strong case that faster economic growth is not only possible but even achievable in the short run if our national leaders would just make some common sense policy changes.

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How Do We Speed Up Economic Growth?

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The 2015 Economic Report of the President has just been released.  It shows that the slow growth of productivity is playing a bigger role in squeezing middle class incomes than the rise of economic inequality.
CaptureThe above chart makes some dire predictions:

  • The labor force, which has averaged 1.5% growth since 1950, is likely to grow just .5% a year in coming decades, because any increase in new workers is likely to be swamped out by baby-boomer retirements.
  • Productivity has grown just 1.3% a year since the end of the last expansion in 2007.
  • These two figures together predict an anemic, less than 2% growth, economy going forward.

The President proposes several policies to address this slow growth:

    • Immigration Reform would provide more highly skilled workers for the economy as well as a more efficient guest worker system for low-income labor.
    • Increased Foreign Trade would expand our export economy.
    • An Expanded Workforce could be achieved with a higher Earned Income Tax Credit to boost dual-income households.
    • An increase of Infrastructure spending of 1% of GDP is estimated to boost output by 2.8% after 10 years.
    • Corporate Tax Reform would encourage U.S. multinationals to bring their foreign profits home for reinvestment.

These are good ideas but much more could be done as well:

  • Individual Income Tax Reform, exchanging lower tax rates for all by closing loopholes and deductions would boost spending by middle- and lower-income tax payers.
  • Reforming Social Security and Medicare by setting higher retirement ages would encourage longer work lives.
  • Reforming the Affordable Care Act by removing the employer mandate would boost productivity by making the labor market more efficient.

Faster economic growth will not only reduce unemployment, it will also make it much easier to shrink the deficit as more tax revenue is raised.  This should be one of the very highest priorities for our elected representatives in Washington!