Friday, March 14, 2014

Blowin' in the Wind

In a recent look at trends of total factor productivity at Twenty-Cent Paradigms, Bill C linked to two NBER papers by Robert Gordon. One paper, and an update.

NBER provides access to abstracts of those papers for free, so that's what I'm looking at. The first paper is Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. The phrase "six headwinds" catches my eye; it promises a summary view of problems that, in Robert J. Gordon's view at least, interfere with economic growth:

Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt.

"And the overhang of consumer and government debt." Last, but not least.

But you know what? Robert Gordon expresses concern only with consumer debt and government debt. He doesn't express concern with the debt of farm business or nonfarm noncorporate business or nonfinancial corporate business. Nor does he express concern over the many components of domestic financial debt. Yes, concern with any debt (other than the tiresome focus on only government debt) is something to be thrilled about. But still...

Graph #1: Consumer and Government Debt as a Percent of Total Debt
The debt that concerns Robert Gordon is less than half of credit market debt, and until the crisis was a decreasing portion of it.

Yeah... So what does Mr. Gordon say in the update?

The primary cause of this growth slowdown is a set of four headwinds, all of them widely recognized and uncontroversial. Demographic shifts will reduce hours worked per capita, due not just to the retirement of the baby boom generation but also as a result of an exit from the labor force both of youth and prime-age adults. Educational attainment, a central driver of growth over the past century, stagnates at a plateau as the U.S. sinks lower in the world league tables of high school and college completion rates. Inequality continues to increase, resulting in real income growth for the bottom 99 percent of the income distribution that is fully half a point per year below the average growth of all incomes. A projected long-term increase in the ratio of debt to GDP at all levels of government will inevitably lead to more rapid growth in tax revenues and/or slower growth in transfer payments at some point within the next several decades.

He reduces six headwinds to four. And he abandons concern with private debt.

1. Demographic shifts: People are exiting from the labor force because the economy is so bad. Fix the economy, and you'll solve Robert Gordon's demographic problem.

2. Education: Again, fix the economy. Make it so that there's a chance getting an education will be beneficial. Make it so that you can get a damn job when you get out of school. This will fix Mr. Gordon's second headwind.

3. Inequality: The growth of inequality is a result of the supply-side policies imposed on our economy since the late 1970s. Those policies were put in place to solve a problem. The policies didn't solve the problem, and they created a new problem. Get rid of those policies, and you eliminate Mr. Gordon's third headwind of four.

4. Government debt: Government debt? No. Private debt, or maybe all debt. But certainly not just government debt.

Fix the economy. Create policies that discourage the accumulation of private debt. Tear down this wall of policies that encourage the accumulation of private debt. Reduce the cost of finance. That's all we need to do. And then eliminate the "fixes" we put in place, that created inequality and globalization and other problems.

The rest will take care of itself.

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