What’s a reasonable expectation for future U.S. economic growth? It’s an important question. Higher growth is critical to avoiding a debt crisis, not to mention improving the American standard of living. Advances in genetics, robotics, artificial intelligence and nanotechnology could bring about another Industrial Revolution. Innovation expert and computer scientist Irving Wladawsky-Berger think the simultaneous advance of information technology and globalization and entrepreneurial capitalism worldwide is ushering in a “golden age of innovation.” And the faster the world grows, the faster American will grow. And vice versa.
It’s also a contentious question. Liberal economist and blogger Brad DeLong is slamming Stanford University’s Ed Lazear for a Wall Street Journal op-ed in which Lazear suggests the long-term U.S. GDP growth rate is 3.4%. Here is DeLong:
The 3.4%/year figure is average real GDP growth over the sixty years from 1947-2007. It includes, among its sources of growth, the rapid population and labor-force expansion of the baby-boom generation. It includes, among its sources of growth, the fact that average labor productivity growth in the tumultuous decades of the 1930s and 1940s lagged behind what was technologically possible, and thus there was headroom for more rapid expansion in the first post-World War II decades. Both of those have passed away. And the growth rate of America’s productive potential these days is lower as a result. Academic forecasters of repute argue these days over whether the long-run potential growth rate of GDP in the U.S. since 2000 and into the foreseeable future is closer to 2.5%/year or 3.0%/year. No economist of repute I know of argues that it is 3.4%/year. Except for Ed Lazear.
DeLong is way too definitive about this, to say the least. What a static way of looking at the world. U.S. GDP growth averaged 3.3 percent from 1960-2007, with roughly half of that growth coming from a growing labor force (1.6 percent) and half coming from higher productivity (1.7 percent). But with America aging, annual labor force growth is expected to slow dramatically to just 0.5 percent. That puts growth around the level that DeLong is talking about.
But an analysis by the McKinsey Global Institute thinks a higher retirement age and smarter immigration policy could boost that rate to 1 percent or so. Yet even then, productivity growth would have to increase to 2.3 percent long term just to maintain that historic growth rate. The good news is that MGI thinks that’s possible, too. Here’s some of what the firm recommends:
1. Boost productivity in the U.S healthcare and education system. MGI notes that public and regulated sectors such as health care and education represent more than 20% of the US economy, but has persistently low productivity growth. But if the US public sector could halve the estimated efficiency gap with similar private sector organizational functions, its productivity would be 5 to 15 percent higher and would generate annual savings of $100 billion to $300 billion. How to do it? MGI doesn’t offer a specific plan other than emphasize how crucial it is that there is a strong linkage between reward and results. And part of that means better information so consumers can make better choices.
2. Reinvigorate the innovation economy. Although the United States remains the global leader in research and development spending, MGI says, other nations are rapidly catching up. U.S. tax policy and regulation should “provide the right incentives for private companies to continue to invest in innovation and expand their US-based R&D activities.” Lower corporate tax rates is one way to go about this. MGI also says that the U.S. needs to ensure that the IT infrastructure and technologies are in place to capture fully the transformational potential of existing and new technologies. The potential runs from Big Data—data-driven business decisions and actions—to cloud computing and the application of advances in biology and the life sciences.”
I would also add in tax reform that moves the U.S. toward a consumption-based tax system.
3. Develop the U.S. talent pool. Think of this: MGI estimates that the U.S. may face a shortfall of almost two million technical and analytical workers and a shortage of several hundred thousand nurses and as many as 100,000 physicians over the next ten years. In aerospace, 60% of the workforce is aged over 45 years old compared with 40% in the overall economy. The United States should a) remove barriers to older workers staying in the workforce longer, improve incentives to technical and analytical training, for example through innovative funding mechanisms and direct links between jobs and educational institutions); and reduce barriers to the immigration of skilled workers.
4. Build 21st century infrastructure. MGI notes that the U.S. ranks 23rd among advances economies in the quality of its infrastructure. “There is major scope for the United States to identify and implement leading-edge practices from project selection to financing and delivery, sometimes through public-private partnerships.”
5. Enhance the competitiveness of the U.S. regulatory and business environment:
The relative competitiveness of the US regulatory and business environment is declining at a time when many competitor countries have taken major steps to create favorable conditions in order to attract companies to invest and participate in their economies. The United States scores particularly poorly on the burden of government regulation and red tape. The United States needs to reduce regulatory complexity, streamline the process of resolving disputes, and eliminate remaining sector-level barriers to more robust competition—learning from the most effective approaches employed elsewhere.
6. Embrace the energy productivity challenge. Thank you, fracking! In addition, MGI clearly wants more investment in clean energy, saying the U.S. ”lags behind others in this regard, and also risks being left behind in important emerging technologies. Clear long-term policy could encourage the market discipline that drives productivity.” I think that is a fancy way of saying MGI wants a price on carbon. That seems unlikely, though the U.S could spend more on basic research.
2.4%? With the right market-empowering policies, American can do better.
Anyway, here is a table from MGI listing policy options depending on how much government intervention you’re comfortable with: