Why Is Growth So Slow?

by Dave Schuler on June 1, 2014

I found this article by James Pethokoukis on why economic growth has slowed interesting but ultimately frustrating. Like so many other such articles it’s much better at stating the problem than producing much in the way of answers. I agree with this:

In 1900, the high school graduation rate was only 6%; now it’s between 75% and 80%. The college graduation rate back then was maybe 2% or less; it’s now around a third. However, again, we are seeing a real fall off in continued growth in human capital, at least as measured by years of schooling. Part of that is math, there’s simply so many years that you can stay out of the work force to improve your job skills. Perhaps we are running up against that. We are running up against the number of people qualified to take on post-secondary education. In primary and secondary education, there are fewer people graduating high school today than there were in the early 1970s and test scores haven’t improved at all.

However, he elides over the facts that the unemployment rate for new college graduates is 8.5%, higher than the general rate of unemployment and that H-1B visa holders are frequently paid less than native-born workers for the same jobs. If we do, indeed, need more workers with more education, wouldn’t you think that the wages should be rising for them and the unemployment rate lower?

Or this:

The key to more robust innovations is more robust entrepreneurship. Big, established firms innovate all the time, but they tend to innovate at the margins. They don’t tend to come up with big industry upending innovations for precisely the reasons that doing so would mess up their current profit centers.

We typically see new industries being created by new firms, new technologies coming to the surface with new firms. New firm formation is really the key to the creative destruction that makes modern economies dynamic and innovative. We have seen a secular falloff in the rate of new business formation and the percentage of people working in new businesses.

I think the solution to that problem is to lower the barriers to new business formation, to stop subsidizing large companies, and reduce the power and effectiveness of the tools, e.g. intellectual property law, that large companies exploit to beat down smaller upstarts. Unfortunately, I can’t see any enthusiasm for doing any of those things because all of them have powerful support constituencies.

Additionally, there used to be a dictum that big companies like to do business with big companies. I think that’s still true but I think it can be extended: big government likes to do business with big companies which prefer to do business with other big companies. In other words the larger and more powerful government becomes the more policy will tend to be oriented to favor large companies and the lower our rate of new business formation will become.

Rather than articles devoted to defining and exploring the problems in minute detail I’d like some articles completely dedicated to solutions.

{ 15 comments… read them below or add one }

... June 1, 2014 at 10:56 am

If we do, indeed, need more workers with more education, wouldn’t you think that the wages should be rising for them and the unemployment rate lower?

You are noticing things, and that is crimethink.

... June 1, 2014 at 11:14 am

I would ask a two part question:

Why is growth so slow, and why are the people running the country so content with this situation?

There’s more urgency in the White House to hug the Press Secretary in awkward fashion and work on the President’s brackets. And there’s more urgency with the opposition to do anything other than address the economic problems of the country.

Seriously, when was the last meaningful push for improving the economy from either party? The last thing I can remember was many years ago when both parties decided that it was important for the Fed to pump tens of billions of dollars a month into the financial sector. And that was only designed to improve the economic outlook for the folks that own the parties. For the rest of us there hasn’t been shit.

jan June 1, 2014 at 11:58 am

IMO, we have deliberately corrupted growth at every turn. I agree that big business should be chastened, allowing smaller business more leeway to create innovative products that might indeed conflict with large corporate interests and their profit margins. OTOH, we should also create incentives for all businesses to hire locally, and not go to overseas cheaper employee pools.

It’s a matter of juggling the work equation to maximize the strengths and capacity of the US, rather than constantly handicapping it because of politically motivated policies that put a stranglehold on job creation, and thus economic growth Such a work equation involves immigration reform/enforcement, reduction of the EPA mandates, relaxing business taxation, better union/business relationships etc., dissolving and then restructuring encrusted, unsustainable entitlement/pension programs that are poisonous to growth. It’s almost like everyone should release and let go of all their prejudices, pre-conceived ideas and start over from a fresh perspective — one that units people’s industrious nature, creating a more open playing field for opportunity for all.

An example, though, of government’s continuing knack to stifle growth, the President is apparently set to exercise yet another executive action, by putting more limits onto coal production. Could this be happening at a worse time, when everyone is struggling to get on their feet? However, climate change has been ratcheted up again, for political purposes, and it’s full steam ahead to assuage a political base by not only stringing out the Keystone pipeline but also going after another energy industry.

Jimbino June 1, 2014 at 4:29 pm

If high school and college graduation rates were any real indicator of success in securing employment, we should just grant every Amerikan kid a PhD at birth. The truth is that, regardless of the graduation rate figures, Amerikan kids aren’t learning English, much less STEM.

Those 2% and 6% who graduated in 1900 were those who really had a clue instead of being mere beneficiaries of welfare, middle-class entitlement and grade inflation.

The Supreme Court in the early 1900s had justices like Oliver Wendell Holmes and his ilk and a president who was well educated, bilingual and a Harvard-educated student of science and nature. What we have now are 9 justices unschooled in science and math, exclusively Roman Catholic and Jewish, and a nearly mono-lingual President who has no clue of science or math.

Times have changed. We apparently have to learn to live with mediocrity in high office.

mike shupp June 1, 2014 at 10:58 pm

However, he elides over the facts that the unemployment rate for new college graduates is 8.5%, higher than the general rate of unemployment and that H-1B visa holders are frequently paid less than native-born workers for the same jobs. If we do, indeed, need more workers with more education, wouldn’t you think that the wages should be rising for them and the unemployment rate lower?

“Elided” isn’t quite the term I’d use. “Evaded” is better — yeah, it mean’s the same, but it’s a commoner term, making the behavior more blatantly visible. As for your question, the guy from Cato answered it succinctly: Businesses are so eager to hire well educated people that offer really specially generous pay, but for some darn reason, modern kids just don’t want to apply themselves to STEM courses and get the education they should have.

Oh? That isn’t the impression you (and I) have? Well, who’s able to give a Really Serious Adult Answer — you (and me, and those pesky statistics) or a Vice President at Cato Institute? Just rhetoric. We can all guess the answer.

Here’s rule 1 for improving the economy: Stop taking advice from people at Cato and their ilk.

mike shupp June 1, 2014 at 11:16 pm

We have seen a secular falloff in the rate of new business formation and the percentage of people working in new businesses.

Well, maybe. Here’s the complication: If I put up a sign announcing MIKE’S BURGERS and start selling hamburgers and shakes, it counts as “new business” in some statistics. If I buy a franchise from Wendy’s and build the same damned fast food joint and staff it with the same damned people, it doesn’t count as “new”, because Wendy’s been around for a while. By and large, if I actually want to sell hamburgers. it makes sense to buy a franchise. But that doesn’t help the statistics.

So rule 2 is Don’t sweat all the details about how hard it is to run a small business and how minimum wages and health insurance have to eliminated and OSHA stopped at the doorway and the FDA kept out of the poultry packing plants. No doubt knowledgeable people could fine tune any number of state and federal regulations, but basically just provide steady economic growth and all sorts of businesses will sprout up and increase their payrolls and that’ll help make for more growth.

mike shupp June 1, 2014 at 11:41 pm

Some other ideas:

3. Let’s revive American regionalism. Bring back steak houses in the Midwest and lobster joints in New England and Creole cooking in Louisiana, and tone the numbers down in other areas, which should give more attention to their own specialties. Let’s strive for more regional franchises and fewer national ones — I include banks and realty companies and drug stores and so on. Let’s see some more Oomm-pah bands marching down streets in Des Moine. more opera houses and off-Broadway shows going up in New York, more circuses in Florida. Stop homogenizing the country. Let life in Maine be different from Los Angeles or even rural California. Let Texas and Washington and New Hampshire be as different as possible. Let it be possible for an American living in Pittsburgh or Cincinnati or Omaha to look around and exclaim happily “It just isn’t the same in other places. I really like it here!” Be more like Europe, in other words.

Or of course, you can go along with watching every state between West Virginia and Nevada shrink down to 50 people or however many it takes to farm corn for ethanol, as everybody else lights off for bright lights and the thrills of life in the New York/Boston/San Francisco/Miami/Dallas smorgasbord.

Or we can just shrug, torch the fence running from San Diego to Galveston, and let in fifty million productive Latinos who’d be perfectly satisfied (for a generation or two) with existence in the Empty Three Quarters of our nation.

mike shupp June 2, 2014 at 12:22 am

4. We should spend a bit more on R&D. It used to be thought, fifty years ago, that something like 3 to 3.5% of GNP could profitably be spent on science and advanced engineering of different flavors, and foreign economists admired the US which led the world, and flirted at that 3% level. And then the Nixon administration came in and decided too much of US R&D was for spaceflight and other unnecessary stuff, that the US government should back off considerably except for health research, and that industry should take its full share of responsibility for pushing science and finding new knowledge and creating new applications and …..

So now Israel (4.2%), Japan and South Korea (3.7%). Sweden (3.3%) and Finland (3.1%) do better, while the US fell down to 2.3% a few years and slowly has worked back up to 2.7% of GNP.

Granted, it’s complex making these comparisons because so much US R&D is military- or intelligence-related. And so much pharmaceutical research is done in the US. or so the pill makers tell us. And we’re doing so well in the computer hardware and software markets!

Uh. Let me wave my arms a bit and suggest it’d be nice if the ISA could produce a rocket engine comparable to those he Russians have been making with minimal changes for forty years. It’d be nice if we could actually mine for minerals on the sea bed, rather than just gabbing about it for fifty years. It’d be nice to actually have a working fusion power plant — that’s another program that’s been running for fifty years now. It’d be nice to have some better and lighter materials for making cars and airplanes and houses. It’d be nice to have better batteries. It’d be nice to integrate parts and nanotech-sized sensors that could predict and warn of mechanical failures before they occurred. It’d be nice to …

Let me suggest the federal government might well spend another percent of GNP on non-military, non-intelligence-related R&D. That’d be about 170 billion per year, about one third of the nominal DoD budget, about the size of the interest on the national debt, or about ten times what the US spends on NASA. It’s an affordable amount.

mike shupp June 2, 2014 at 12:53 am

5. There’s an argument that there’s a “moral hazard” here, that the US government shouldn’t spend money on research that industry might otherwise be spending itself. Granted, there are areas where the government isn’t spending on R&D, and industry is also not spending, so this is kind of a Fantasyland issue, but we’ll take it seriously.

My humble suggestion is that the US government might want to start some companies which compete with established companies, and should funnel much of its research spending through those companies. There’s precedent — the Communication Satellite Corporation, or COMSAT, set up back in 1963 by the Kennedy administration, and still in business.

There are probably half a dozen expensive approaches to genomic-based medicine which the existing drug firms are currently tiptoeing about; the US ought to compete with them. Maybe we should have an undersea mining company. Maybe we should fold earth surveillance satellites of different types into a federalized LANDSAT corporation. Maybe we should nationalize every coal mine in the country and make them subsidiaries of a Federal Clean Energy Corporation. Maybe we should start some state-of-the-art hospital and wellness treatment centers which do things established hospital franchises don’t want to do, or won’t do cheaply — install prosthetics, perhaps?

Think boldly! Not all these firms would make money, or much money, but if just one or two did, they’d carry the rest. And yes, half the Republicans in Congress will die of apoplexy because of this mindless socialism, but that’s NO reason not to be bold.

mike shupp June 2, 2014 at 1:18 am

6. Reform telecommunications and the internet. Shut down the NSA (and the TSA while we’re at it). Spend lavishly on a second (or third or fourth) generation internet which isn’t so easily hacked as the current one; this might involve new hardware or new programming languages which lend themselves less to kludges than the current ones. Design safeguards to protect messages from read and fiddled with by hackers. Put a modest charge on some types of messages — a penny each, say, on unsolicited emails — to reduce spam. Think about operating a secured pay-based internet in parallel with an insecure-but-still-free system, for several decades.

Do all this with the world watching, (or a dozen national academies of engineering) after making solemn promises that the new Internet will be pure as snow. Wait for the inevitable dozen top spooks and Congress critters and 2nd-rank agency and department brass to suggest subverting the system all over again, now that no one will be suspecting it. Execute top spooks and Congress critters and government officials, slowly, painfully, publically until the point is made.

There’d probably be a market for 2nd-generation computer hardware and software which the US might profitably fill. And even if there wasn’t … some of us Americans would feel like we’d taken a good hot bath and relieved some of the load on our souls. Maybe that isn’t a purely economic issue, but so what!

mike shupp June 2, 2014 at 1:55 am

Of course. this is all a setup for a greater issue. We, as a society, are going to make a big choice in the not so distant future, the issue being What Do We Do About The Lower Classes?

It doesn’t seem that there are going to be decent jobs for everyone in America who might want one; it doesn’t look like there’s money to ensure that all Americans get healthcare all through their lives, that they all get educated to the best of their ability or interest, that they will afford a comfortable retirement. Etc.

So what do we do? We can run Nazi-style extermination camps for the “unfit.” That’s one extreme. We can aim to be a rich society that can afford to run something like the New Deal’s CCC program and basically subsidize the existence of 3/4 of the population. That’s the other. Neither looks politically visible.

In between … We can push people over the border, so retirees with nothing but Social Security are basically exiled to Latin America or Africa. We can look the other way while people die from measles and gunfire and auto accidents and untreated diabetes, etc. We can build (or tolerate the building of) Brazilian-style favelas in which the vast majority of the poor can make a subsistence living. We can bring peonage or sharecropping or some other scheme that would bind the poor to the land or to individual aristocrats — hey, it worked for the Romans, till the barbarians came! We can put contraceptives in the water supply and try to lower the population. We can try to make education more effective than it presently is, in hopes of achieving a future in which “All the children are above average.” We can stumble on, year after year, bearing an ever increasing load, but finding it easier to bear that load than to stop and figure out how to deal with it. None of these look like real winning ideas.

So rule 7… there’s no rule 7. I have no clue.

Guarneri June 2, 2014 at 11:49 am

“Why Is Growth So Slow?”

I’d talk about the roles of investment, innovation and incentives……………but people here don’t seem to care.

mike shupp June 4, 2014 at 9:47 pm

Sucks, doesn’t it? Nobody seems to read my comments either!

Dave Schuler June 5, 2014 at 5:39 am

I read every comment in every thread.

mike shupp June 5, 2014 at 4:37 pm

That sounds depressing too!

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