Sunday, August 7, 2016

Some Observations about American Economic Growth

They say that the first million dollars is the hardest.  Each successive million dollars of gross revenues is easier than the previous million dollars; growing from $1 million to $2 million is easier than earning the first $1 million, and growing from $10 million to $11 million is easier still than growing from $1 million to $2 million (all examples of simple $ growth).  The reason is easy to understand: whatever it is you’re doing, doing it again is easier; practice makes perfect (and after a while it is just more marketing).  On the other hand, it is easier to grow your business by 10% while your business is still young.  For example, growing from $10 million to $11 million is easier than growing from $100 million to $110 million is easier than growing from $10 billion to $11 billion (all cases of 10% growth).  The same is true of stock prices.  Adding $1 to a stock price of $10 is harder than adding $1 to a stock price of $100 (simple $ growth).  But growing the stock price by 10% from $1.00 to $1.10 is easier than growing it 10% from $100 to $110.00 (%age growth).  All “mature” corporations had their most explosive %age rates of growth (gross revenues or price of a share of stock) while they were young.  And what is true about the rate of a corporation's growth and the increase in the value of a share of stock is equally true of a nation’s economy – its GDP – which is pretty much the aggregate of millions of companies big and small; it is easier for a GDP to grow from $1 trillion to $1.1 trillion than it is to grow from $10 trillion to $11 trillion (10% growth).  All “mature” economies had their most explosive rates of growth while they were young; mature economies do not grow as fast as youthful economies.  China, with its 7% rate of economic growth, is not a “dynamic” economy, it is a young economy; the U.S., with its 1% to 2% rate of economic growth, is not a “static” economy, it is a mature economy.  And it is “stuck” with the fact that a mature economy does not grow as fast as a young economy.  Changing the party of the occupant of the White House will not change that.

Everyone complains that our current rate of economic growth, 1% to 2%, is too low.  Republicans like to blame a Democratic President for the sluggish state of the economy, as if a President ever had such power over an entire economy.  No one is coming to grips with the fact that a 4% rate of economic growth may be a thing of the past.  Indeed, we may be damned by our own success.

For a little perspective, since 1978 (gotta start somewhere) our GDP has grown at a 4% rate or better in the years 1983, ’84, ’85, ’88 (Reagan years), ’94, ’97, ’98, ’99 and ’00 (Clinton) (only 9 years out of the last 35).  And not since then, not once in the last 15 years.  The most pronounced collapses of GDP growth have been 1978 – ’82 (Carter - Reagan, 4 years), ’84 – ’91 (Reagan - Bush I, 7 years), and ’04 – ’09 (Bush II, 5 years).  The Clinton economy was a stellar boom and the Obama economy has been sustained but anemic (except for the Obama Boom on Wall Street).

I am reading a book, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (2016, 666 pages), by Robert J. Gordon, an eminent economic historian.  Its thesis is that sustained robust growth (4% or more) of the American GDP is no longer likely.  To encapsulate the second half of his argument: with the exception of our homeless (whose numbers are growing), many of our poor have the basic necessities of life: living quarters, electricity, heat and air conditioning, stove and refrigerator, clean running water, waste disposal, an indoor bathroom, an automobile, TV and cable service, a computer and a cell phone.  One hundred years ago, few of us were so lucky as most of us today.  There’s not much room for growth in this advanced economy where the poorest among us can afford the basic necessities of life.  We are a “mature economy.”  How do you grow a mature economy?

Here is Gordon, summing up his own work:
American growth slowed down after 1970 not because inventors had lost their spark or were devoid of new ideas, but because the basic elements of a modern standard of living had by then already been achieved along so many dimensions, including food, clothing, housing, transportation, entertainment, communication, health, and working conditions. The 1870 - 1970 century was unique: Many of these inventions could only happen once, and others reached natural limits. (op.cit., p.641)
What then are we to do?  How can we remain a model for the world of the successful economy that everyone emulates – if we slow down when we reach our maturity, if we nearly stop growing in our middle years?

But before we grant Gordon his conclusion – that we are doomed to a slow 1% - 2% growth rate – let’s ask ourselves what a 4% - 5% rate of economic growth would look like.

It is not easy imagining what 4% growth would look like considering the high plateau we already have attained.  What more do average Americans really need or want badly enough?  A more expensive home, a better or a second car, more dining out, concerts and live theater, a real vacation for a change.  But most of us can’t afford these things now, and these lovely dreams will not grow the economy if we can’t pay for them.  Too many Americans unemployed and too many underpaid are huge obstacles to robust economic growth.  If more corporate revenues (a slice of the economy that is experiencing robust growth) were diverted into the pockets of Mom and Pop America, we might experience the growth we only dream about.

GDP measures the monetary value of final goods and services - that is, those that are bought by the final user - produced in a country in a given period of time."  GDP can be measured as the total value of production, of expenditures, or of income.  But it only counts production that is sold, and income that is spent.  Note that savings and investment (a species of savings) do not contribute to the GDP.  And then note that corporate profits that end up as cash-on-hand, or stock buy-backs or as dividends do not impact the GDP.  Whereas corporate excess that is redistributed to workers (who will spend that money) will grow the GDP.  We have a Devil’s Dilemma here: the corporation keeps the cash and the stock price grows, or it distributes the cash and the GDP grows.  It is a Devil’s Dilemma because no CEO or Board of Directors will ever choose to profit the economy at the expense of its own share price.  As I suggested several times in my book, To My Countrymen, what is good for one (a corporation) is not always good for all (the economy), and vice versa; this is just a brutal example of that paradox.

But that is just private sector growth.  The public sector contributes to the GDP too.

Politicians have held out the promise of an enhanced “quality of life” for a long time while delivering nothing.  What would this look like?  First, “rebuilding our infrastructure.”  Better schools and higher teacher pay; our roads and bridges in good repair; clean air and water; cleaner renewable energy; broadband Wi-Fi everywhere.  And then: safer work-places; a shorter work-week and work-day; more leisure time (and better ways to fill it than watching the tube); universal health-care (really!).

But who would pay for it?  In some ways, our economy is already shrinking.  Our labor participation rate has been slowly trending downward since the year 2000.  Many Americans who have enjoyed full-time employment are now working part-time.  Honest-to-God “rocket scientists” check shopping bags at Walmart.  More and more people are spending less and less because they are earning less and less.  So, who will pay for it, who will pay for “rebuilding our infrastructure”?  Warren Buffett said: “I just think that - when a country needs more income (tax revenue) and we do, we're only taking in 15 percent of GDP, I mean, that when a country needs more income, they should get it from the people that have it.”  In other words, tax the folks with the money, those at the top of the economic pyramid who have benefited from historically low tax rates for thirty-five years (their share of the income pie has crept up for thirty-five years; the pie has gotten bigger, but only a few are enjoying bigger slices).  It is time that they paid back the trillions of dollars that they borrowed from the middle class, from the rest of us.  We can have our cake and eat it, too.  Or we can look forward to sharing less and less of a growing pie.

For those of you who are religiously opposed to redistribution of wealth from the top-down (but have remained silent about redistribution from the bottom-up, the reality of the last 35 years), let’s imagine that we CAN “grow the economy” at a robust 4 - 5% rate.  Imagine a whole new industry.  Who could have imagined a “search engine” start-up becoming the behemoth Google (now Alphabet)?  A company with gross revenues of $75 billion (0.375% of our GDP) and a market capitalization of $544 billion!  But it took seventeen years to get that big.  We can take a peek into the future.  We know that self-driving cars are on their way; we know that better medicines and computer-assisted surgical procedures are being created that will extend our lives with better health; we can imagine living in smart-homes; and we watch the advance of AI (artificial intelligence) and robotics with mixed feelings.  But how many of these new industries will be the size of Google?  How many more Googles will have to emerge and grow over time to help grow our economy at a 4% rate?  And the killer question, one more time: who will be able to pay for this new and improved life?  Will you own a self-driving car?  Will you live in a smart home?  Will you have access to life-extending medical procedures?  Growing the economy requires not only the supply of new things, it requires buyers!  Otherwise, we are moving toward the world of the Matrix (where the human masses are fuel for the machines).

On the other hand, our great multi-national corporations will continue to grow while our economy falters, by selling to economies with lots of growth potential in them.  But the fruits of that growth will not be shared by most Americans.

There are surely ways to improve most Americans’ way of life.  But right now, most Americans just can’t afford them.  Many are underpaid, some work less than full-time, some are unemployed and more than a few are homeless.  The private sector by itself is trending away from more employment, and trending to lower pay.  If only more of us could afford the brave new world that is right around the corner, maybe that would kick the economy into robust growth.  Or maybe no one would care about growth if we all felt better taken care of within our impersonal economy.

How much room for growth is left in the US economy?  We need to stop letting our rate of economic growth tell us how well we are doing.  We need to take charge of our economy so that it benefits us all, not just a few at the top.  What we can do is make sure that everyone shares the basic necessities of life (a moving target, to be sure), and that there are no more homeless.  And, sure, that will require a redistribution of wealth and income (and I do not mean welfare for all, or handouts for all – but that is another essay entirely; in the meantime, brush up on FDR and how he handled the Depression).  You have a better idea?  I know, “grow the economy.”

Sure.  Tell me how.  Both political parties like to boast that they can kick the economy into a 4 - 5% growth rate.  They are lying or they are just economically ignorant.  But when will the American people get that?  Do you, dear reader, get it?

For a shorter – but no easier – book on this happy subject, try The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril (2015, 297 pages), by Satyajit Das, a highly-respected international economist.