Economic Growth — Obama’s Economic Legacy, Part 4

The United States has been in a prolonged period of slow growth: Why? The answer lies in slow, grinding, demographic movements.

By Ned Hill, A One-Handed Economist, and Professor of Public Administration and City & Regional Planning at The Ohio State University’s John Glenn College of Public Affairs, powered by The MPI Group

I talked about Barack Obama’s record on national debt in the last post; today, I discuss his record on economic growth and employment.

Common criticisms of the Obama economic record include slow economic growth, a low rate of productivity growth, slow job growth, and declines in the Labor Force Participation Rate [LFPR].  All are true, and they are all connected. This is a story that is best told with pictures.

ECONOMIC GROWTH: TAKING THE LONG VIEW
The first graph is of the annual percent change in quarterly real GDP from the first quarter of 1948 to the fourth quarter of 2016. [This is the percent change in inflation-adjusted GDP from the same quarter of the previous year. The data are also seasonally adjusted.] Periods of national recession are shaded.

Figure 1 GDP Growth Rates Start to Slow in the mid-1990s
Annual Growth Rate in Quarterly Gross Domestic Product: 1948(1) to 2016(4)

There are two types of movement evident in the figure. The first is the impact of business cycles that drive the growth rate away from long-term trend lines. The second is a steady decline in the GDP growth rate that took place in the mid-1980s, followed by a marked decline after the 2001 recession—this is when growth rates began to fluctuate between 2.5 and 3.0 percent. This recent decline justifies a closer look at GDP growth rates after 2000 in the next figure.

Figure 2: GDP Growth Rates Fluctuate Between 1 Percent and 3 Percent After the Great Recession
Annual Growth Rate in Quarterly Gross Domestic Product: 2000 (1) to 2016(4)

The last ten years have been dominated by the dynamics of the Great Recession of 2008-2009, its precedents and its long, slow recovery. The United States has been in a prolonged period of slow growth that coincides with recovery from the recession of 2000. What happened? The largest portion of the answer lies not in economic policy, but in slow, grinding, demographic movements.

DEMOGRAPHICS AND THE WORKFORCE: A PIG IN A PYTHON
The baby boom generation was born between 1946 and 1964. This means that the first boomers reached age 25 in 1971 and the last in 1989. [Ages 25 to 54 are considered to be the core, or prime, ages of labor market participation.] After 1989, the growth rate in the number of people reaching their prime working years started getting smaller. Then, in 2001, the first of the boomers celebrated their 55th birthdays, another milestone age in the demographics of the labor market. 55 is the age when retirements and mortality begin to take hold, both accelerating with each additional year of age. The last of the boomers will hit 55 in three more years—2020: all of this means that growth rates in the labor force will continue to fall for the next decade, simply due to generational changes in birth rates.[1] The U.S. Labor Department’s Bureau of Labor Statistics [BLS] estimated that the annual growth rate in the civilian labor force from 2004 to 2014 was 0.6 percent. For the next decade, the BLS estimates an annual growth rate of 0.5 percent.

Figure 3: Women Contributed to GDP Growth from 1955 to 2000 by Going to Work
Labor Force Participation Rate of Women Ages 25 to 54 from 1955 to 2015

Another major demographic contributor to the slackening pace of GDP growth involves changes in the labor force participation rate [LFPR] of women. The LFPR of prime-age females, ages 25 to 54, is presented in the third figure and shows steady increases from 1955, when the LFPR of women was approaching 40 percent, to its peak in the late 1990s, when the rate nearly doubled—peaking at 77 percent in 2000. Bringing larger and larger proportions of women into the labor force increased GDP growth rates by growing the available pool of workers, in addition to the bump that came from larger cohorts of baby boomers marching off to work. The LFPR for women appears to have reached an equilibrium in the late 1990s; the growth rate in the number of women in the workforce increased by 1.3 percent a year from 1994 to 2004 and dropped nearly by half from 2004 to 2014, to 0.7 percent a year. Over the next 10-year period it is expected to drop to 0.6 percent a year.

The last big piece of the labor force puzzle involves the LFPR of prime age [25 to 54 years old] men. In short, it is in a state of steady decline and has been so since the late 1960s.

The LFPR for men has declined by 10 percentage points over the nearly 60 years from the late 1950s to 2016. There are three reasons [really hypotheses] given for the steady decline: an increase in the numbers of men staying in school for longer periods of time as the skill requirements of work have increased (this has an economic upside), the impacts of incarcerations and felony convictions on the ability of men to be hired, and older men losing jobs that they have held for a long time and being unable to find another one that can replace their lost earnings. The rate of decline accelerated slightly with the onset of the Great Recession in 2007.

Figure 4: The Labor Force Participation Rate for Men: A steady state of decline
Labor Force Participation Rate of Men Ages 25 to 54 from 1955 to 2015

The number of prime-age workers in the workforce, both men and women, is now in decline, and the change has been large. The growth rate in numbers of prime age adults in the workforce, ages 25 to 54, grew at an average annual rate of 0.8 percent from 1994 to 2004, dropped to an average annual rate of -0.1 percent from 2004 to 2014, and is estimated to recover to an average annual rate of 0.4 percent from 2014 to 2024.

Figure 5: The Civilian Employment to Population Ratio Plunged with the Housing Bust and the Great Recession
Civilian Employment to Population Ratio 1948 to 2016

The combined effects of the demographics of the baby boom generation, increases in the proportion of prime age women working, and declines in the LFPR of prime age men on the economy are made clear in the fifth figure—the Civilian Employment to Population ratio. There are steady increases in the ratio from 1971 to 1999, with the exception of recession years. Then the ratio began to tail off as the economy recovered from the 2001 recession. Reasons for the tail-off includes progressively smaller increases in the size of incoming cohorts of young workers, baby boomers starting to age out of the workforce, labor force participation from prime age men deteriorating, and the declines in the LFPRs of secondary school dropouts

Demographics are not destiny, but they do govern the size and growth rate of the labor force. Typically, growth rates in GDP are closely associated with growth in the labor force. There are three ways to offset the influence of anemic increases in the size of the native-born population: (1) increase immigration for people with in-demand skills, (2) increase the productivity of the existing labor force through the use of more efficient plants and equipment—in other words, increase productivity and digitization and mechanization of work, or (3) improve the efficiency of the existing workforce by improving their skills.

Policies to increase the size of the labor force will increase the growth rate of GDP, but they will not necessarily increase average incomes. Improving productivity through technical advances or having a smarter workforce will increase GDP growth rates and has the potential to increase average economic well- being.

Needless to say, President Obama cannot be held responsible for the impact of long-term demographic trends.

EMPLOYMENT: THE NEAR-TERM VIEW

Figure 6: The Obama Jobs Recovery Started in 2011
Net job loss or gain from November 2007

The sixth figure plots monthly job losses and gains from the month before the Great Recession started, November 2007; the change in jobs is charted from December 2007 through January 2017.  There are a few dates to keep in mind: President Obama started his first term in January 2009, which is marked by the black vertical line in the chart. And, according to the Business Cycle Dating Committee of the National Bureau of Economic Research, the recovery from the Great Recession began in June of 2009.

Jobs continued to disappear through early 2010, even as the recovery was underway.  The economy lost 8.5 million jobs from November 2007 through February 2010. Here are the facts:

  • Job growth began in March of 2010, but a stall in the recovery set in that summer.
  • Continuous job growth did not begin to take place until October 2010.
  • Sustained job growth of 150,000 a month did not occur until late in 2011.
  • The recovery point was reached in April 2014 [the point where the number of jobs equaled the number in November 2007].
  • It took six years and five months to regain the number of jobs lost during the Great Recession.
  • As of January 2017 the economy had 7.2 million more jobs than it had when the Great Recession started.
  • This means that the economy generated 15.8 million jobs in seven years, from the economy’s low point in February 2010 to January 2017.

Now that the economy has recovered from the Great Recession, the increases in the job numbers are slowing down with increases between 140,000 and 145,00 a month as unemployment rates approach full employment. This is aligned with a labor force that is growing slowly due to baby boom retirements coupled with small post-baby boom cohorts entering the workforce.  Demographic projections indicate that the decline in the LFPR will be on the order of 0.2 percentage points a year going forward due to demographic momentum.

It is true that average earnings have only started to grow recently.  Here I look at two factors: shifts in supply and demand within the labor market based on skills, and the slow growth in productivity.

Shifts in demand based on the relative supply and demand for skill-based labor can be traced back to the recovery from the recession of 2001, especially in the middle of the nation where commodity manufacturing dominated regional economies. The United States has an over-supply of unskilled workers compared to demand for their skills. Some of this is due to international competition for low-skilled production [Hello China, Vietnam, Thailand, and Bangladesh] and falling prices for commodity production and labor-intensive production.

The second factor is that American manufacturing is experiencing its fifth industrial revolution—call it Industry 5.0. Even though overall productivity is low in the U.S. economy, productivity is growing in capital-intensive manufacturing as digital factories, digital logistics, and the digitally integrated enterprise are becoming real.

Combining these two forces—an over-supply of unskilled and semi-skilled labor and Industry 5.0—results in falling wages in sectors of the economy where the supply of labor is greater than demand and there are labor shortages in new occupations that demand new skills; such is the outcome of economic disruption. But the overall rate of productivity growth remains low: why?

At this point I can only offer hypotheses, or educated guesses. It is not because high tax rates are preventing companies from investing in productivity-enhancing machinery.  Interest rates have been near zero for almost a decade: the cost of capital is not the problem.

Five hypotheses are being debated in the economics literature as to why productivity is on a low growth path:

  1. Former Fed Chair Ben Bernanke asserts that a global glut of savings is pouring into the US looking for safety, not necessarily high returns.
  2. Robert J. Gordon hypothesizes that gains from technology are confronting diminishing returns.[3] Productivity rates drop as a result.
  3. Baumol’s disease is on the rise.[4] This is where spending is shifting into sectors that are intense users of skilled labor but where it is hard to increase productivity—think education, medicine, arts, and personal services.
  4. Shifts in the income distribution have taken place, with a larger percentage of total income going to high earners, resulting in increases in aggregate savings rates and decreases in aggregate consumption rates.[5]
  5. Ideological differences at the federal level on taxation and public sector investment policies are resulting in slower economic growth due to disinvestment in public infrastructure.

My main point is that the nation is in a period of low growth that is not immediately amenable to Presidential influence without kicking off a round of stagflation—stagnant growth coupled with cost-push wage inflation. There is also a lot of work to be done by economists and students of public policy on testing these hypotheses—and many are beavering away on them.

Now that we are closing the first month of the Trump Administration, there is great uncertainty as to what President Trump’s economic team will do. [First the team has to be assembled and shown their offices.] The prospect of a trade war with our closest trade partners, Canada, Mexico, and China, is real; the prospect of ballooning structural deficits with rumored steep tax cuts for the top of the income distribution coupled with regressive consumption taxes is a reasonable expectation; and we could experience lower global economic growth due to the disruption of Brexit from the European Union coupled with a USexit from the multilateral global system of trade.  Add in uncertainty in the health care sector of the US economy and potentially wasteful spending on a wall to nowhere and we have a few things to worry about.  Enjoy what we have now: a nice, modestly growing economy that with wise stewardship should continue on its upward path.

 

[1] Also see: “Labor force projections to 2024: the labor force is growing, but slowly.” Monthly Labor Review. December, 2015. https://www.bls.gov/opub/mlr/2015/article/pdf/labor-force-projections-to-2024.pdf and Dixon, Robert, John Freebairn, and Guay C. Lim. February, 2011. “Net  flows in the U.S. labor market, 1990–2010.” Monthly Labor Review. https://www.bls.gov/opub/mlr/2011/02/art2full.pdf

[2] Bernanke, Ben S. Why are interest rates so low: Part 3. The Global Savings Glut. The Brookings Institution. https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-so-low-part-3-the-global-savings-glut/

[3] Robert J. Gordon’s 2016 book on this subject is: The Rise and Fall of American Growth. Princeton University Press. He has a 2012 paper available from the National Bureau of Economic Research that presents the core of his argument: Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds http://www.nber.org/papers/w18315. Gordon’s Ted talk is at: https://www.ted.com/talks/robert_gordon_the_death_of_innovation_the_end_of_growth?language=en

[4] The Economist’s September 29, 2012 column “An incurable disease” reviews William Baumol and David de Ferranti’s book ’s The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t, Yale University Press, 2012. The column offers a good introduction to what has become known as Baumol’s cost disease. Baumol developed a formal model in his 1967 article in the American Economic Review, “Macroeconomics of Unbalanced Growth.”

[5] Ben S. Bernanke, Paul Krugman, Kenneth S. Rogoff, and Lawrence H. Summers have been presenting different views around global secular stagnation.

A good starting point is The Economist’s coverage on December 31, 2015. “Economists’ evolving understanding of the zero-rate liquidity trap: Low rates are increasingly seen as a permanent feature of the global economic landscape.” http://www.economist.com/blogs/freeexchange/2015/12/zero-one-then-back-zero

Follow with Krugman’s semi-technical blog post on his views of the modern liquidity traps and the exchange between Bernanke and Summers on secular stagnation. April 1, 2015. Liquidity Traps, Local and Global (Somewhat Wonkish). https://krugman.blogs.nytimes.com/2015/04/01/liquidity-traps-local-and-global-somewhat-wonkish/

Krugman focuses on diminished spending by consumers and governments and makes an explicit Keynesian argument in his November 11, 2015 column in the New York Times. “Liquidity Traps, Temporary and Permanent.” https://krugman.blogs.nytimes.com/2015/11/02/liquidity-traps-temporary-and-permanent/

Rogoff’s concern is over debt overhang—especially public debt. Stephanie Lo and Kenneth Rogoff. January 2015. Secular stagnation, debt overhang and other rationales for sluggish growth, six years on. Bank of International Settlements Working Paper 482. This paper connects to themes in the masterful book by Carmen M. Reinhart and Kenneth S. Rogoff. This Time is Different: Eight Centuries of Financial Folly, published in 2009 by Princeton University Press.

Summers presents a case for a combination of structural issues resulting in secular stagnation. Foreign Affairs. March/April 2016, “The Age of Secular Stagnation: What it is and what to do about it.” https://www.foreignaffairs.com/articles/united-states/2016-02-15/age-secular-stagnation

The Economist expressed concern that central banks of advanced economies have reduced ability to influence national and global growth rates through traditional monetary policy tools. The Economist. February 20, 2016. “Out of Ammo?” http://www.economist.com/news/leaders/21693204-central-bankers-are-running-down-their-arsenal-other-options-exist-stimulate]

 

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