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No “law” of growth justifies fiscal tightening

When  it comes to interpreting employment malaise, three mainstream groups vie for policy dominance, at least according to the reckoning of blogger and professor Brad DeLong at an conference session last year where mainstream economists faced off with scholars from one of the heterodox economics associations. (Here is a link to DeLong’s blog site.) One was in evidence in an article in the opinion section of the New York Times on Sunday. Roughly speaking, here are the three groups of theorists of the prolonged post-financial-crisis slump:

  • A “weak confidence” group, which argues that improved investor and corporate sentiments are needed, along with greater certainty regarding future policies
  • A group arguing that the economy has reached a mature phase where the underlying determinants of growth—thought to be demographics and technological advance—have reached limits or turning points that lie beyond the control of macro policymakers.
  • A group of Keynesian stagnationists who believe distributional trends and contractionary fiscal and monetary policy have weakened the economy’s potential to grow over the medium and long terms.

Just back from this year’s version of the same conference, and a meeting of pluralist economists the day before, I take the occasion of yesterday’s commentary to pose a critique of the “new growth math” view of the second group in the list above. In line with employment stagnation explanation 2, the opinion piece’s author Ruchir Sharma argues that Trump cannot achieve the growth rates of the Reagan years, given putatively irreversible trends of reduced population growth and productivity-growth slowdown. Sharma’s argument is that growth rates are determined roughly by population growth and productivity growth. US population growth has slowed over the years and productivity growth cannot possibly rise enough to bring back growth rates achieved after the deep recession of 1981-82. Finally, attempts to challenge this supposed speed limit court inflation and exploding deficits. This argument seems wrong on its face, leaving out much that is important about the way the economy and fiscal policy work:

  • Productivity growth is endogenous (effect as well as cause), and tends to grow slowly when labor is inexpensive and when few new machines are needed. Reverse the falloff of growth through increased workforce and capacity utilization, and technological progress will tend to follow. Of course, renewed technological leadership in some big industries would also be very helpful to growth.
  • Sharma does not mention unused capacity, which allows increases in output and employment  to occur without immediate increases in productivity or the capital stock.
  • Moreover, improved employment growth also would likely bring back a reasonable consensus in favor of immigration, and improve incentives for migrants themselves to come to this country. Also, many discouraged workers and people who are involuntarily underemployed remain to be brought back into the workforce, although they are already in the domestic population.
  • The Reagan boom—which of course followed a severe recession early in his presidency—was largely the result of fiscal policy stimulus. Reagan’s fiscal expansion unfortunately favored the rich and military spending priorities, rather than social programs or education, yet it was effective in driving GDP growth. Likewise, new fiscal stimulus is likely to succeed somewhat, despite a likely tilt toward the wealthy. While narrow employment measures show less slack now than during the Reagan boom, nonetheless, unemployed resources do exist, and wage inflation is far more contained now, after decades of weakened labor bargaining power and mostly contained energy costs.
  • Growth optimism and friendliness to fiscal stimulus by US policymakers may ease revenue pressures on foreign policymakers who are under artificial fiscal constraints and rules, allowing them to stimulate their own economies. That benefits both foreign and domestic economies.
  • Watch out that a falloff in infrastructure and educational investment won’t make us irrelevant as an economic power if we adopt a cautious policy approach based on the notion that fiscal loosening can bring only inflation.
  • The article takes the obvious biases of Trump and his advisors as a clear indication of the backwardness of any anti-austerity fiscal policy agenda—but anti-deficit fiscal approaches in the US and in other countries have almost certainly hurt the poor most of all. Watch for a slippage as the author cites backward-sounding xenophobic rhetoric in support of a conclusion that Trump–and presumably others–are wrong on this distinct issue. Note the misleading teaser “Nostalgia won’t make the economy grow faster.” Greater stimulus to aggregate demand, along with other sensible policies, will.
  • While output and employment growth can be improved, one should not forget the need to fight for other policy objectives that may be politically far more difficult to attain. The above arguments do not imply any optimism is warranted about reaching other key policy goals for any reasonable democracy in the US as the new administration and Congress take control. To return to the historical analogy, the latter Reagan years saw rapid growth, but saw miserable policies in many areas. Demands for gender equity, reasonable regulation, and the like will remain appropriate in what is of course likely to be a mostly hostile political environment.
  • The piece sees budget deficits that are high, given the age of the expansion, but the expansion has been unusually weak, especially in creating jobs.
  • Keep in mind that fast growth rates were also achieved in the late 1990s under the Democratic administration of Bill Clinton, though Trump for obvious reasons prefers a Reagan-era analogy. Broadly, still higher growth rates were attained in the era after World War II and before about 1970. If history is to be our guide, the lessons are not clear.
  • The piece concentrates on  arguing that growth rates named by Trump and his  advisers (3.5 percent) cannot be achieved, giving short shrift to the obvious thought that substantial but less dramatic increases in economic growth might be attainable in spite of recent trends.
  • The article takes a position known to Keynes in his era as the “Treasury View” and supported today by self-styled “centrist” think tanks. Indeed, the idea that factors beyond the control of macro policymakers more or less determine growth remains a backward view that prevents progress in solving a wide range of problems.
  • Watch for the more backward macro policy stances of the coming political era in Washington to take the form of attacks on modern central banking techniques and on pro-growth monetary policy. There, Trump and Congress should refrain from some expressed intentions to oppose policies that actually stabilize the financial sector and promote fuller employment in the auto industry and other interest-rate-sensitive sectors. Moreover, anti-environmental policies—if adopted–will also be among those that prove deleterious, at least in the long run. The NYT article, along with the incoming  administration, sees deregulation and fiscal stimulus as unambiguous stimulants to growth, but many forms of deregulation will add to downside uncertainty and risk.

I continue efforts with Tai Young-Taft to work on models that take into account progressive growth possibilities.

As a side note, at the pluralist ICAPE conference, I bumped into fellow blogger-economist Josh Mason, whose blogging efforts are now at this link . He attacks mainstream efforts to analyze economic stagnation as a bizarre and special set of circumstances in this recent post. As I explained to him, his fine cyber-efforts had eluded recent efforts on my part to keep up with them. I now have a good URL and link. After my own presentation at that conference, I  continue to work intensely with coauthor Tai Young-Taft to model a world in which the economy can remain largely off track for a long time, but to avoid assumptions like Sharma’s that seem almost unrealistically hopeless.


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