Courtesy of Zero Hedge
ConvergEx's Nicholas Colas asks "Can the US economy get back to the 3% GDP growth it enjoyed in the 1980s – mid 2000s?"
White House economic policy makers say “Yes”.Most professional economists say “No”.
History says, “Worker productivity drives economic growth, not politicians or economists. Fix productivity and you can get to 3%.”
History may not be laconic, but it has a point.
Since the end of World War II, productivity growth has been the most important factor in GDP growth – even more so than greater female workforce participation. So how does the US improve worker productivity? That conversation has been hijacked by the tech sector, but the answer must lie elsewhere. No one doubts that 21st technological advances are impressive, but they have done nothing for measureable productivity or wage growth (unless you write code).
When I started as a Wall Street analyst in 1991, I spent countless hours in the corporate library searching for old annual reports and other financial statements. If you wanted Chrysler’s 1982 10K, it was on a CD-ROM and you printed it out on nasty smelling chemically treated paper. Back issues of the Wall Street Journal were on microfiche – images on plastic index-card sizes you needed to pop into a projector to read.
Now you can get all that information and more on the Internet, delivered to your smart phone/tablet/PC, at any hour and in any place on the planet with a wireline or wireless phone connection. Countless data providers will make a historical financial model for you on the fly. Stock price charts are free from Yahoo! and Google, plus many other sources.
All this has made me much more productive – I doubt I could write these notes as frequently as I do without the Internet. Once a week, maybe… Twice in a pinch. But daily? Let’s put it this way – I could, but you might not find them as useful.
One easy example: the Richmond branch of the Federal Reserve has a must-use US economic overview they keep updated on a weekly basis. Whenever I have to give a macro talk, I just use that deck rather than spend days reinventing this particular wheel. That way I can spend my time thinking about the data, rather than just finding it. You can see it here.
What’s even better about the Richmond deck is that it shows HOW the Fed thinks about the domestic economy. The first thing after the title page is a review of recent GDP growth, followed by longer-term trends back to 2007. That pride of place is telling: the US central may have a stated “dual mandate” of employment and inflation, but they clearly see overall economic growth as the starting point for any discussion of the domestic economy.
And then you get to the third slide, which decomposes long term GDP growth into two key drivers: the increase in the size of the workforce and the change in the productivity of those workers (GDP/total workforce headcount). Here is what that graph shows:
Long term (10 year average) GDP growth has been through 3 distinct phases since the end of World War II. The first was a period of 3.5 – 5.0% growth from the 1950s to the early 1970s. From the 1970s to the mid – 2000s, the US economy grew around 3%. Since the Great Recession, 1.5% growth has been the norm.
Growth in the workforce shows little correlation with these trends. The peak here was in the early 1980s at just over 2% annually (also a 10 year average) – primarily a function of women entering the workforce in greater numbers. From there it has been a long slow slide to the 0.5% growth we see today.
Productivity growth seems to be the real driver of GDP growth since the 1950s. It was highest in the 1960s at 2-3% annually (10 year averages here, too), dropped to 1% in the 1970s along with GDP, and rebounded to 2% 80s, 90s and early 2000s along with GDP’s 3% sustainable trend.
Various White House officials have gotten lot of grief of late from professional economists and other pundits about their goal of returning the US economy to a sustainable pace of 3% GDP growth. The Richmond Fed’s slide tells us what that debate is really about. Improve the current parlous state of productivity growth (1.1%, as shown on Slide 41 of the Fed deck), and you will get better structural GDP growth. It is a one-ingredient recipe.
There is one school of thought that says, essentially, “You’re doing it wrong” – how economists measure productivity doesn’t accurately capture all the wonders of the Internet. A few points:
Perhaps because services like Google and Facebook are free, we are missing billions of dollars of value in the classic definition of GDP. See here: https://www.bloomberg.com/view/articles/2017-05-22/the-problem-with-prod…
Or perhaps old time economic measures don’t accurately reflect quality improvements in software offerings and other services: https://www.bloomberg.com/news/articles/2017-05-15/u-s-stats-officials-s…
And one recent counterpunch that says “nope, the data as observed is correct”: https://www.nytimes.com/2016/03/06/upshot/silicon-valley-has-not-saved-u…
The trouble with claiming a widespread undercounting of US worker productivity is that wage growth has been so slow since the Great Recession. The annual change in the Employment Cost Index has hovered between 1.5 – 2.5% since 2009 versus 3.0-3.5% in 2007. Growth in Average Hourly Earnings was below 2% between 2010 and 2015 and even current readings of 2.7% are well below pre-recession levels of 3.0 – 3.5%. If we are underestimating productivity growth so badly, why aren’t wages rising as much as a decade ago?
In fact, the intersection of technology and weak worker productivity growth is pushing society in an entirely different direction: replacing “inefficient” people with machines and software that can grow more productive with future upgrade cycles. We’ve seen this movie before (railroads and cars vs. horses, factory automation, etc), but this is the IMAX version. And no one really knows how it turns out….
All this puts the “3% GDP growth debate” in a different and, I think, more useful light. It is really about reasserting the preeminence of humans – the workforce – in any calculus of macroeconomic policy. Make them (us, really) more productive, and the economy will grow faster. And if that is impossible, and with it that 3% target, then technology will replace the worker rather than simply augment his or her efforts.
