We’ve been there for a very long time, and there’s no obvious, easy way to drive it higher.
Real GDP grew at a rate of 2.13 percent from the first quarter of 2013 through the fourth quarter of 2016; from the first quarter of 2017 through the end of 2019, the rate was 2.35 percent. Who knew that a difference of 0.22 percentage points would turn out to be the difference between an economy that is “carnage” and an economy that is “the best in the world, by far,” between “anemic” and “booming”? I am racking the old noodle trying to think of a variable that explains this sudden change in the mood with which the nation’s political commentators greet two awfully similar sets of data.
The old oogedy-boogedy is never going to die, and Americans remain deeply committed to their superstitious conviction that presidents are magical priest-kings who make the rains come and the crops grow and ensure the fecundity of the flocks by propitiating the GDP gods. Presidents invariably encourage that kind of thinking, not the least of them Donald J. Trump, who promised that his election would somehow lead to sustained 3 percent real GDP growth and that a Republican tax bill would produce growth of “4, 5, maybe even 6 percent, ultimately.” It wasn’t long ago that the White House was projecting 3.2 percent growth for 2019. It wasn’t close to that, and that does not seem likely to change. In fact, year-over-year growth in 2019 was slower than in 2018.
So, why are we stuck in the neighborhood of 2 percent?
Cutting the data a slightly different way, we’ve been stuck at 2 percent for a very long time: The real (which is to say, inflation-adjusted) long-term per capita GDP growth rate in the United States has sat at around 2 percent for decades and decades. There are lots of short-term peaks and valleys, but the long-term economic growth rate for the United States — adjusted for inflation and population — traditionally sits around 2 percent.
The New York Times blames some of the slowdown on “a tight job market.” Unemployment is very low, and most people like that — politicians certainly like that. Low unemployment means that businesses have to raise wages to attract the workers they need, and that seems to be happening — wage growth has been pretty solid of late, especially at the lower end of the market, where such growth is most appreciated. But wage growth, welcome as it is, does not necessarily come from an economy that is growing strongly and hence making the country as a whole better off — higher wages can simply represent an income transfer from employers to employees. There isn’t anything necessarily wrong with that — for the purposes of this conversation, we should try to think about how things work rather than how we feel about how things work — but that can constrain growth, too: If a business can’t find enough workers, or if hiring them costs too much, then it might decide against expanding its operations, adding a new line of business, etc.
So, in light of that and those per capita GDP numbers, maybe we just need more workers. Our workforce participation rate has been declining since the turn of the century and currently sits at around 63 percent, and 72 percent for men 20 years old and older. At first glance, our workforce participation rate is not unusually low: It’s right around the same level as Japan’s and Germany’s, but well behind New Zealand’s, the Netherlands’, Sweden’s, and — hold on to your stereotypes! — France’s. But it is more complicated than that. A 2015 study from Barclays found that when the data are adjusted for age, the United States has the lowest workforce participation rate of any of the countries it studied. The United States looks better in the non-adjusted numbers because its people are less likely to be of retirement age than are, say, the Japanese. In fact, U.S. workforce participation among prime-working-age people declined between 2005 and 2014 while participation was growing, if only slightly, in Japan, Germany, and the United Kingdom. Our rate has ticked up a little since then, but not radically.
If we don’t have enough workers, or enough high-productivity workers, then there are some policy changes that we might want to consider. There is education and training for the domestic workforce, though we have had only very modest success at earlier attempts at reform in those areas. We might increase the workforce participation rate by making some social benefits less generous, but there isn’t very much evidence that excessively liberal welfare support is keeping very many Americans from working, and most of the advanced countries with substantially higher workforce participation have more extensive welfare states than ours, rather than less. Another possibility — one sure to irritate populists left and right — would be to make it a lot easier for high-skilled, high-income immigrants to relocate to the United States to work or start a business. We don’t have to make that a path to citizenship or even permanent residency, which brings up a lot of complex non-economic questions. But there’s pretty good reason to believe that people who are successful software developers in India or petroleum engineers in Venezuela are going to be successful in the United States, too, and probably much more so. Lots of developing countries worry about the “brain drain,” the tendency of their best and brightest to be drawn to wealthy, dynamic countries such as the United States. We should do everything we can to make that problem worse for them.
What about traditional conservative economic priorities such as tax cuts and regulatory reform? I think there is room for tax reform (our tax code is cumbrous and deformed by cronyism) and regulatory reform, too. But the ladies and gentlemen on Sand Hill Road and Wall Street do not in fact cite tax burdens all that often when asked why there isn’t broader and wider investment than there is right now. They do sometimes talk about a relative shortage of truly compelling opportunities. That doesn’t mean that they don’t want their taxes to be lower or for the regulators to bother them less. But it may not be the case that those are the most important variables right now.
Outside of the world of venture capital and private equity, things are even tighter: In the fourth quarter of 2019, business investment was declining at an annualized rate of 6.1 percent. Big tech firms such as Apple and Google are sitting on hundreds of billions of dollars in cash and give no sign of plans to invest very much of it. (Apple did put a billion or so into its growing Austin campus — chickenfeed, in context.) Even after Apple repatriated its famous cash hoard (the value of which is more than the market capitalization of Toyota, the world’s second-largest automaker), the company has shown no sign of having discovered much of anything more productive to do with its cash than sit on it.
Apple has some pretty clever people. Google, too. Are there hundreds of billions of dollars in investment opportunities out there waiting for them that they are just too stupid to see? That does not seem like a very likely explanation to me. It is true that J. D. Vance, Peter Thiel, and Marc Andreessen are putting $125 million into a venture-capital firm dedicated to looking for opportunities in the heartland, partly on the theory that venture capitalists suffer from geographic biases — about half of all VC money is invested in the Bay Area, New York City, and Boston. Let’s not sneer at $125 million, but that’s not very much in this world. And Andreessen seems to be having second thoughts about venture capital in general: His firm, Andreessen Horowitz, has restructured itself as a financial adviser in order to be able to pursue other kinds of investments, notably in cryptocurrencies.
The conversations in Silicon Valley are big on complexity and uncertainty. The ones in Washington are big on superlative adjectives. One of these is quite a bit closer to reality than the other.
But one thing is certain: In that hypothetical world of real GDP growth at “4, 5, maybe even 6 percent, ultimately,” the policy choices look relatively rosy. In the 2 percent world — the real world — the policy environment is a good deal hairier, and the range of good choices for dealing with such unpleasant realities as a burgeoning public debt and an unsustainable entitlement system gets narrower and uglier with each passing year. Once Washington is out of adjectives and bluster, what’s left? If we are getting the wrong answers, then maybe we are asking the wrong people the wrong questions.