Maybe They’re Just Happy With the Status Quo

Robert Samuelson wonders if the slowdown in growth in the U. S. economy is permanent:

Economists’ pessimism emerges from their projections of “potential GDP.” GDP (gross domestic product) is the economy’s total output. Potential GDP is an estimate of what could be produced when everyone who wants a job has one and when businesses are operating at maximum capacity. Two factors govern the growth of potential GDP: changes in the number of workers (and time spent on the job) and changes in labor productivity. Productivity means “efficiency” and reflects many influences (technology, worker skills, management quality).

Potential GDP’s growth represents the economy’s speed limit when it’s near peak capacity. Trying to grow faster, it’s argued, will create shortages of workers, goods and services — and raise inflation. Even before the Great Recession, economists had lowered estimates of potential GDP, reflecting the anticipated exit of baby boomers from the labor force. But the recent revisions go beyond this widely predicted shift.

There are various explanations for why this may have occurred including demographic change, lack of “animal spirits”, reduced investment. Interestingly, he mentions a point I’ve made here frequently:

Another possibility is that the economy’s slowdown started before the crisis but was obscured by the artificial stimulus caused by the credit bubble.

I think the stage has been set for our economic problems for some time—twenty years or more—and a major factor is currency manipulation on the part of our trading partners. However, Mr. Samuelson also mentions a possible explanation that seems pretty likely to me:

Economist Robert Gordon of Northwestern University has argued that, since the early 1970s, technological advances have lagged and that the Internet boom of the 1990s was only a brief interruption. Naturally, productivity growth has suffered. Nobel Prize-winning economist Edmund Phelps of Columbia University, in his book “Mass Flourishing,” identifies a clash of values between what’s required for faster economic growth and what’s desired for personal security.

“Increasingly, the processes of a nation’s innovation — the topsy-turvy of creation, the frenzy of development, and painful closings,” he writes, are seen as something “that we are unwilling to endure any longer.”

This raises the question who is this “we”? As suggested earlier today some people are doing very, very well. My view is that they wouldn’t do nearly as well if we were following policies are than those we have and they’re fighting, successfully, to prevent us from adopting policies that would produce more robust growth. They’re just happy with the status quo.