In his Wall Street Journal column William Galston is skeptical that the United States’s economy is capable of growing as it did thirty years ago:
We need to make it easier for formerly incarcerated men to rejoin the workforce, for women to balance the demands of work in the home and in the market, and for older Americans to continue working well past what previous generations considered retirement age. We need to attack substance abuse—especially opioids—which thwarts too many men and women on the threshold of the workforce. And where there is solid evidence that poorly designed social supports discourage work, we should restructure them.
Although these changes would make a difference, they can do nothing to alter the reality that America is aging rapidly. Two thousand was the last year in which the entire baby-boom generation was of prime working age, and 2019 will be the first year in which none of it is. During the last two decades of the 20th century, the U.S. workforce expanded at an annual rate of about 1.5%. During the next two decades, it will expand at an estimated 0.5% annually. By itself, this slowing growth of the workforce will be enough to knock a full percentage point off annual economic growth. Productivity improvements that once yielded 3% growth will now yield only 2%.
There is no sign of a new baby boom on the horizon. On the contrary, the birthrate reached an all-time low in 2017, continuing six decades of decline. So there is only one way to boost the growth rate of the workforce: expand dramatically the number of working-age immigrants admitted each year. If the U.S. prioritized working-age entrants the way most other advanced countries do, it would increase annual labor-force growth by up to 0.3% without increasing the aggregate level of immigration.
I’ve said little about the other key component of economic growth—productivity—because most economists regard it as unpredictable. Between 1950 and 1973, it grew at 2.4% annually before collapsing to just 0.7% from 1974-81. It accelerated to 1.7% between 1982 and 1990, and to 2% from 1991-2001. But then, just when analysts began to hail a new golden age of information technology, productivity growth fell to 1.4% in 2002-07, and to 0.9% during the past decade.
We understand the basics of productivity—investment in the workforce, plant and equipment, research and development, and infrastructure, plus an environment that encourages innovation. But the pace at which new technologies and processes are integrated into the workplace remains mysterious. If a new generation of robotics and artificial intelligence yields a productivity boom, we could return to the growth of the postwar years. But we don’t know enough to bet on it.
I’m skeptical for a different reason. American managers don’t invest here the way they used to and I don’t believe they will accept the level of investment required to achieve that level of growth.
I look at things in terms of inputs and outputs. For a certain level of inputs broadly considered you get a certain level of outputs also broadly considered. There is no reason to believe that is linear over time and quite a number of reasons to think there are declining returns to scale. In 1900 a single guy working in a garage and making things that would change the world was, if not a commonplace, at least not unheard of. Now that’s incredibly rare. We’ve picked the low-hanging fruit and it will take a lot of investment to produce the next Big Thing. Maybe more than managers are prepared to make. Almost certainly more than their stockholders are willing to tolerate.
I don’t think comparisons to the early 1900s, when industry composition was more capital intensive, is particularly relevant.
For the past 30 years, practically an entire career, the capex to sales ratio has fluctuated between 5.5% – 7%. Capex follows perceptions and evidence of demand far more than creating it. The personal computer or iPhone only comes along once in a while. When it does it is usually preceded by a concept, not just raw spending. The only example of simple brute force demand creation I can think off is the spin off effects from the space program.
I don’t think managers have lost their mojo. I’d look first towards risk, regulation and net of tax cash flow from investment before I’d start handing over investment money to Nancy Pelosi or zealots in the R&D department.
With a new sheriff in town in a couple more years we will see how capex spending has responded.
They wouldn’t have come along at all without investment. That business investment is below what it was 20 years ago is a matter of record. My concern is that the next PC or iPhone will require not just an equivalent amount of investment but a lot more investment which managers just aren’t willing to make.
Or even longer. Government had been making R&D investments for sixty years to develop the technology making iPhones possible, which means long-term thinking is key. What keeps managers from making long-term investments? Numero Uno is the outside shareholder, particularly the hedge fund activist types who want a return right now. Corporate governance desperately needs a revolution, including non-voting shares for those not actually working at the business. Those who don’t have a stake shouldn’t be calling the shots.
I’m not sure that’s the key. The investments weren’t made for long-term reasons but for short-term ones. They were trying to solve specific problems and the developments which, ultimately, led to the iPhone were among many.
And the investments made by companies dwarfed anything ponied up by the government. I’m honestly not sure what has changed but it’s clear that something has—the rise of the institutional investor, hedge fund activists (as you note), and the conviction that plenty of returns can be had without capital investment.
“They wouldn’t have come along at all without investment.”
You don’t say. That’s a truism, but without much meaning or insight. The vast majority of investment is not skunk works projects. Even small companies like the ones we own and control consider pretty fundamental investment opportunities in new technology, product or channel. But the big dollars – geography, people, capacity, efficiency – need some tangible driver: Demand. Dream dollar investments have a way of vaporizing. You do them because you must, but adult supervision is required.
The capex to sales ratio is also a matter of record. You want to infer causality from absolute levels. I look at the demand – investment relationship. I’ve been party to investment decisions for at least 23 years; that relationship is where the action is. I just don’t experience, see or conclude what you do. It seems more to be one of your biases, which leak out at times. Management, especially large corporate, bashing.
As I said, in a few years we will see how the investment path evolves. I’ll bet one of those shiny new dimes its better than under Obama.
IP laws are another serious issue. To be blunt, it’s good for competitors to steal technology because it forces institutions to continually develop new ones just to stay alive. Also, it’s good for workers in a capitalist system to have power to resist employers. This forces the employer to invest to get more output from each worker. It isn’t a coincidence investment has fallen as wages have stagnated.
Graeber’s work suggests the outright inefficiency, bureaucracy and top-heavy culture of American management is also playing a role.
I don’t disagree with that. Let’s look at it this way. The growth rate is very noisy. Over the period of a quarter, a year, five years, etc. and excluding recessions it will vary. The Obama Administration was content with an economy that varied from .5% to 3%, yielding an average of 2% (0-1% real). The Trump Administration wants to boost that to an average above 3%—closer to the historic norms. To get that they’ll need growth varying from .5% to 6% and I think that will be tough to do for the reasons I’ve listed. I think they could do better than the Obama Administration. But averaging 4% or more nominal and greater than 2% real? I doubt it.
“The growth rate is very noisy. Over the period of a quarter, a year, five years, etc. and excluding recessions it will vary. “
I guess, Dave, that’s the essence of my point. Don’t draw such conclusions.
I’ve been part of these decisions for so long it’s second nature. No one has lost their balls. Boards and management drool for good investment opportunities. But they are not paid to waste capital. True groundbreaking type investment is very speculative, and horribly expensive. It must be a throttled portion of your investment portfolio. Most is demand driven.
Ask yourself how big a check you are willing to write every time you chastise management. I get asked in $50 – $250k chunks. It focuses one.