Wednesday, June 17, 2015

Four Percent Is A Nice Round Number

Jeb Bush seems to think America can go back to the post-WW II industrial days of four percent plus GDP growth.  He doesn't exactly have a plan to do that, but it sure sounds good as a sound bite. Slate's Jordan Weissman explains:

See, the thing is, there are lots of reasons that the economy is probably not going to grow at 4 percent per year in the near future. The fact that Bush suggests otherwise doesn't bode well for anybody hoping that his economic vision will be any more tethered to reality than his competitors'.

But before we get into all that, you may be wondering: Why 4 percent? “It's a nice round number,” Bush explained to Reuters last month. “It's double the growth that we are growing at. It's not just an aspiration. It's doable.” To get a little more specific, the figure apparently originated during a conference call several years ago, during which Bush and several other advisers were brainstorming potential economic programs for the George W. Bush Institute, the Texas think tank named for Jeb's famously cerebral older brother. During the talk, Jeb casually tossed out the idea of 4 percent growth, which everybody loved, even though it was kind of arbitrary. The center now has a "4% Growth Project." It does stuff like publish fact sheets about all the wonderful things that would happen to our country if we could ever manage 4 percent growth year after year.

To be fair, it's not as if 4 percent growth is impossible, at least intermittently. The U.S.pulled it off a few times during the Reagan era and in the heat of the dot-com boom. The U.S. averaged 4.3 percent growth during most of its post–World War II economic expansions. But then the 21st century arrived. Between 2001 and the end of 2007, gross domestic product grew at an average rate of 2.8 percent per year. (Which makes the presence of a 4% Growth Project at the George W. Bush Institute more than a bit ironic, even if you forget that whole financial crash.) During the Obama years, the economy has expanded even more slowly.

And nobody really expects growth to rapidly shoot back up, at least unless we experience a technological revolution even more impressive than what the Internet delivered. Here's why. In the end, potential economic growth boils down to a pretty basic formula. It's productivity growth plus workforce growth. You can certainly break it down into smaller components if you want to get granular about things, but that's the big picture: productivity plus labor supply. And right now, neither of those forces is working in America's favor. Because the Baby Boomers are aging into retirement, the Bureau of Labor Statistics expects the labor force to grow by 0.5 percent per year in the near future, down from the 0.7 rate we enjoyed from 2002 to 2012. To simplify a bit1, that means productivity is going to have to jump up by 3.5 percent per year if we want to hit the magic 4.0.

That just doesn't really happen. Even during the prime years of the tech boom, workers only became about 2.5 percent more productive each year, on average. Unless artificial intelligence is about to catapult us into the Player Piano–esque future economists and tech types love to theorize about, it seems pretty unlikely that the United States is about to match that sort of progress in the coming years.

And let's not forget that the big 4% growth periods in the Reagan and Clinton years were turned into big recessions and economic disasters by the previous two Presidents named Bush, all involving wars in the Middle East. What makes anyone think Jeb would be any different?

I sure don't.

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