The 4% Solution:
Unleashing the Economic Growth America
Needs, ed Brendan Miniter with
foreword by George W Bush.
Why has the
United States economy stopped growing? Aversion to
risk is unprecedented. Despite a record low
30-year mortgage rate of 3.5%, Americans rent
rather than buy. Corporations have stuffed nearly
US$2 trillion in cash under the mattress rather
than invest in their own businesses. Venture
capital shuns manufacturing, and the short-lived
stars of the tech world in social media have
disappointed investors.
Firms on the
threshold of expansion, with 500 to 1,000 workers,
suffered the worst job losses of any cohort during
between the
first quarter of 2007 and
the first quarter of 2011 with an 11% drop in
total employment.
How intractable
America's economic problems have become is
illustrated in the George W Bush Institute's new
collection of essays on restoring growth. A
diverse collection of authors agrees that it is
necessary as well as possible to restore a high
growth rate (the 4% target is arbitrary but as
good as any), but that is like the mice agreeing
that the cat should wear a bell.
The
extreme dispersion of recommendations gauges the
intractability of the problem.
Two of the
most prominent offerings in the Bush Institute
volume, for example, propose diametrically opposed
monetary policies. David Malpass, a former Ronald
Reagan administration Treasury official, argues
for sound money and a strong dollar, while Nobel
Laureate Vernon Smith proposes a massive currency
devaluation like Thailand's during the 1997 Asia
crisis. Malpass believes that monetary policy is
essential to the solution, while Smith contends
that neither monetary nor fiscal stimulus will
help, and the solution lies in currency
depreciation.
As it happens, Thailand's
currency devaluation (by more than half at the
worst of the 1997 crisis) compelled the country to
sell its bankrupt banking system to foreigners and
attracted fresh capital after the Thai assets went
on fire sale. The only investor to whom a devalued
America could sell its banking system is China.
Even if America wanted to sell (unlikely) and
China wanted to buy (even less likely), a major
devaluation would disrupt the world economy and
destroy confidence in American assets abroad as
well as at home.
Prof Smith got his Nobel
for a simplified economic model that leaves out
expectations, among other things. But expectations
are the nub of today's problem. Investors are
drowning in capital but terrified to commit it. To
layer on yet another dimension of risk (namely
devaluation) would make matters worse, and that is
why I share Malpass' views about sound money.
Smith's pessimism about monetary and
fiscal policy, though, should not be dismissed out
of hand. It is possible that the air pocket in
investment and the economic stall reflect a
longer-term trend rather than a cyclical
pause.Capital goods orders never regained their
1999 peak during the presidency of George W Bush,
and have fallen considerably farther on Barack
Obama's watch.
Non-defense capital
goods orders (excluding Aircraft), nominal and
deflated by capital goods producer price index
(PPI) Source: FRED
Did the
housing bubble sequester the nation's capital
during the mid-2000s? And was a return to normalcy
aborted by an anti-business administration
committed to massive new entitlements funded by
the largest tax increase (for health care) in
American history? Or are Americans enervated? Have
the 30-year-old baby boomers who entered the
Reagan years full of ambition and afloat in home
equity become today's 60-year-old scaredy-cats,
traumatized by the $6 trillion loss in household
wealth of the past four years?
In 1980,
home equity had risen by 60% in real terms over
the preceding decade; in 2012, by contrast,
homeowners had lost 40% of their equity in the
preceding decade.
Are Americans
disciplined enough to compete with the cadres
pouring out of Asian cram schools? Is a surge in
Asian immigration (to 400,000 in 2010, against
only 350,000 Hispanics) the best economic news we
have had of late?
I don't believe it. I
agree with the authors of the Bush Institute
volume that the entrepreneurial engine can be
jump-started. But economics is more like medicine
than rocket science. You won't find out if the
medicine works until you try it, and even then the
doctors will disagree.
If Mitt Romney is
elected president in November, we will know soon
enough whether our problems stem from adverse
policies, or long-term paralysis. I am convinced
that an administration that fosters
entrepreneurship rather than derides it (as in
Obama's now infamous "You didn't build that!"
gaffe) will elicit a revival of animal spirits.
It's like Pascal's wager; we might as well bet on
Romney because if he's wrong we're dead anyway.
Can we achieve a long-term growth rate of
4%, as the Bush Institute's executive director
James Glassman and most of the book's contributors
believe? That is a big number; at 4% growth, the
economy triples every 28 years, and will grow
20-fold over the 78-year life of the average
American. Numbers do not capture such
transformations; life looks and feels different as
old technologies give way to new. Market
expectations in the sense that economists use the
word hardly apply; we are speaking, rather of our
long-term imagination.
In 1934, when
today's 78-year-olds were born, the first computer
was three years away, penicillin first was being
tested, and a primitive television station was
broadcasting in New York. The world of 2012 was
remote, but remotely imaginable. The US economy
measured by real GDP is seventeen times larger
than it was in 1934 and grew at an average rate of
3.7% over the period.
But it is a
different world, in which children no longer die
of scarlet fever or polio, and families flung
across the world Skype together.
What
would the economy look like in three generations
of sustained growth? Only one of the original
components of the Dow Jones Industrial Average
(GE) remains in the index. In 1934, whole
industries - computers, pharmaceuticals, aircraft,
communications - were waiting to be born.
What do we imagine today? Glassman is an
optimist; his book Dow 36,000 appeared in
1999, at the peak of the stock bubble occasioned
by the conceit that cyberspace would change our
lives in some fundamental way. No such thing
happened; the last blush of this idea was the
social media debacle earlier this year.
The Internet has made it easier to shop,
flirt, leer, and gossip; it was the late Apple
chief executive Steve Jobs' genius to recognize
that the vast majority of computers did nothing
more than surf the web and exchange brief
messages, so that a tablet would do better than a
laptop. But the tablet and smartphone have come
and matured as innovations without making a dent
on the broader economy.
Nobel Laureate
Myron Scholes (whose work on option pricing with
Fisher Black and Robert Merton helps measure the
cost of uncertainty) titled his contribution to
the Bush Institute volume, "Not all growth is
good", by which he means the housing bubble as
well as scattershot government stimulus spending.
Prof. Scholes was an early victim of the
mortgage-backed securities bubble, as a partner in
Long-Term Capital Management, which blew up on
levered mortgages in 1998. One would like to know
what he thinks of the Internet bubble of the
1990s.
Annual growth of working-age
population Source: UN World Population Prospects,
Medium Variant
We are right in the
middle of the fastest decline in the growth rate
of working-age population (from about 1.5% a year
in 1995 to less than 0.5% a year) as the Baby
Boomers retire. Population growth contributes to
growth; the greater the supply of workers, the
faster the economy can grow.
That cuts
both ways, though. Between 1790 and 1950, faster
GDP growth led to faster working-age population
growth, as economic opportunity attracted
immigrants. Since 1950, though, working-age
population growth has led GDP growth, and explains
about a quarter of the variation in the GDP growth
rate.
Lagged effect of 5-year
percentage growth of working age population on
5-year growth rate of real GDP, 1950 to 2011 Source: US
Census; BEA; Macrostrategy LLC Calculations
Part of the solution, as Charles Blahous
and Jason Fichtner argue in a chapter on Social
Security reform, lies in giving workers an
incentive to extend their working careers.
Americans live healthier and longer lives than
they did when Social Security set the retirement
age at 65, and the decline in the labor force can
be offset by later retirement, in theory. But it
will be a challenge to get this done in practice.
American households of 2 or fewer vs. 3
or more Source: Census Bureau
America used to be a nation of large
families, and an economy driven by homebuilding
and consumer durables. Now households of two or
fewer comprise 60% of all households, and
one-person households 30% of all households. That
explains the housing bubble.
In 1973, the
United States had 36 million housing units with
three or more bedrooms, not many more than the
number of two-parent families with children -
which means that the supply of family homes was
roughly in line with the number of families. By
2005, the number of housing units with three or
more bedrooms had doubled to 72 million, though
America had the same number of two-parent families
with children.
We seem to envision a world
of hipsters and oldsters living in tiny apartments
communicating through Facebook, the one new thing
to grab the tech market's attention during the
past couple of years, only to disappoint again.
Where is the television, the computer, the
antibiotics, the rockets that brought us from 1934
to 1982? Gene sequencing, targeted cancer drugs,
and nanotechnology?
The risk is that we
are becoming the wrong sort of people with the
wrong sort of desires with the wrong mix of
technology. Much as I favor the free market over
statism, it's possible for the free market to
choose the wrong things. If the trend continues,
Vernon Smith will be right at some point: the US
economy will cease to respond to monetary and
fiscal tools, although for different reasons than
he seems to believe.
Of course, Americans
might never find out how bad things are unless
they elect Mitt Romney and adopt Reagan-style
incentives for investment. Another four years of
the current trend, and the medicine may no longer
work.
The 4% Solution: Unleashing the
Economic Growth America Needs, edited by Brendan
Miniter with foreword by George W Bush. Crown
Books, New York 2012. ISBN-10: 0307986144. Price
US$26.00; 368 pages.
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