Growth is Good, How do we keep it?
The question being asked by the Economist Claudia Sahm “Why is Growth So Good . . . “
I did not add the YouTube of Economist Claudia Sahm. You will have to catch it on her site for which some of her commentaries can be read and presented elsewhere, . , , hence it is here at Angry Bear also. Asking the question, “Why is Growth So Good” (I am asking) when we had a lousy president in the form of Joe Biden. Yep, we had inflation. The alternative without the programs put in place by Pres. Biden would have been far worse. Enough of the “told you so” and read on. It is a good commentary by Economist Sahm
Why is growth so good and how do we keep it going?
– by Claudia Sahm
My interview on Bloomberg this morning started with a trillion-dollar question:
It is important that we don’t just look at a GDP number and say, “Oh, it’s almost 3%,” and move on. We need to stop and ask, “Why is growth so good?”
There and in my Bloomberg Opinion piece, I focus on the pickup in productivity growth in recent years and how policymakers can keep it going.
The gains are impressive. The growth in labor productivity, which has averaged 2.3% in the past two years, is about half a percentage point faster than in the four years before the pandemic. While it may not sound like much, that difference would shave almost 10 years off the time it takes to double the level of real GDP.
The US stands out globally.
Joseph Politano’s excellent piece on productivity shows that the gains in the US are unlike any of our peer countries.
The underpinnings of inflation since the pandemic have received orders of magnitude more attention than the underpinnings of productivity. That’s a mistake.
Break down barriers.
There are many components to the productivity increase. One of them is likely the notable increase in business formation since the start of the pandemic.
When applications spiked early in the pandemic, there were questions about what it meant and the staying power. Impressively, as Decker and Haltiwanger document, the increase in applications did turn into an increase in new businesses (with employees), and most importantly, the faster pace lasted beyond the early years of the pandemic.
After decades of a falling startup rate, since the pandemic, the US economy is slowly becoming more dynamic with more younger firms. An important question is why the increase in new businesses happened and whether it can be extended. My piece mentions some of the possible causes:
The initial burst of business formation early in the pandemic appears to have been a reaction to the large shifts in economic activity due to the public health emergency and a shift to remote work. Pandemic relief policies also appear to have had the unintended consequence of lowering the financial barriers to starting a business. In fact, there is evidence that stimulus payments and other income support boosted entrepreneurship. Areas with higher populations of Black Americans, often underrepresented among business owners, were particularly likely to see an increase in applications, suggesting how powerful it can be to lower barriers to entry.
While we should not expect another round of fiscal relief, one lesson from the pandemic is that policies that reduce barriers to entry can have sizable effects on creating new businesses. The incoming administration should apply that insight to its deregulation agenda. Lowering entry costs and promoting competition through better regulation could similarly support productivity. Interest rates can raise the costs of starting and growing a business, so the Fed must be careful not to choke innovation with higher interest rates than necessary.
Dynamic labor markets.
Another likely source of the recent pickup in productivity is the strong labor market during the recovery. Again, here is from my piece:
The productivity pickup is not just about new, innovative firms. It’s also about workers moving to jobs that better match their skills. While disruptive, the so-called “Great Resignation” of 2021-22 allowed many workers to move to jobs that allowed them to be more productive. Researchers have pointed to the high churn of workers earlier in the pandemic as a key reason for the recent upturn in US productivity. New business applications were also higher in industries and geographical areas with higher levels of job-quitting. A dynamic labor market is directly tied to a dynamic business environment.
The remarkable movement of workers may also help explain why the US, but not its peers, experienced a productivity boom. The US offered generous income support during the pandemic but did not prioritize keeping workers with their employers in the recession, such as in countries like Germany. The subsequent rapid recovery in demand in the US was met with many workers moving to better-paying (more productive) positions.
What’s the lesson for now to extend the productivity gains? A dynamic labor market is central to a dynamic economy. The cooling of the labor market, albeit gradual, is also a cause for concern. The rate of employees quitting jobs (often to move to a new opportunity) has fallen back to levels last seen in 2015, when productivity growth was notably slower. Moreover, the quits rate shows no signs of stabilizing.
In closing.
We need to talk about growth and understand why it’s been exceptionally good in the US in recent years. It’s not about settling the score over fiscal and monetary policy. It’s about finding ways to sustain progress.
For both the Fed and other policymakers, now is not the time for complacency. Watch the labor market and the rate of business formation: If they slip back and become less dynamic, productivity and supply-driven growth could slip away, too. The US economy has come too far in the last few years to allow that.
Again, here is a discussion that cries out for a complimentary energy analysis. How much energy; what types of energy sources. I am not that comfortable that that our energy transition plans and our carbon goals are well-matched to sustaining GDP and productivity growth. Made up numbers here, but what happens if we need to take out an incremental 5B BTUs from carbon sourced every year for 20 years and can only replace it with 3.5B of clean energy. And if that 3.5B functions more like 2.8B due to intermittency? My view of the really big picture is that the world’s pretty modest “progress” after about 30 years of significant focus is that people want to be more materially prosperous and significant progress is going to require several (many?) decades of people being less materially prosperous.
@Eric,
I see huge SUVs and pickups with single drivers everywhere. It is common to see one of these vehicles parked with the engine running and the driver playing with their cell phone. That’s not material prosperity, that’s conspicuous consumption.
Know what imperils GDP? Trump’s threatened tariffs. Trump’s threatened deportations of 10 million undocumented workers in the food production and building trades.
November 5, 2024 was a huge day for AB as it secured 4 more years of dragging DJT into any discussion. Anyway, big trucks are revealing in that ~30 years into “existential” climate change, sales are pretty good, at least relative to overall vehicle demand. It’s a matter of taste. But it is not a matter of law because officials are generally too timid to deliver any kind of corrective to high energy life. I know a fellow with a quite old Honda Accord that has visited New Zealand 5 times since 2012….that’s his big truck.
@Eric,
LMAO!
You’re the one who brought up concerns over GDP. I only pointed out that they were unserious compared to the threatened Trump tariffs and deportation.
well, there is always nuclear, to make up for the intermittent of some parts of the energy production. and unless you want to move deep inland, to avoid the increasing number of severe storms from the coasts, and increasingly severe storms and floods inland. course the increasing energy hogs that are AI models and crypto currency processing which seems to need more and more power.
Eric:
You are off on a tangent. What did Economist Sahm say? Here, I will help you focus:
–– –– Dynamic labor markets
–– A dynamic labor market is directly tied to a dynamic business environment
–– A dynamic labor market is central to a dynamic economy.
––Watch the labor market and the rate of business formation: If they slip back and become less dynamic, productivity and supply-driven growth could slip away, too.
Nine times Economist Sahm points to “Labor” as the need. Without which input, productivity does not exist or improve.
Growth is good because of fiscal stimulus. Some of the stimulus is from fiscal policy (CHIPS act, IRA), the rest is from (misunderstood by most economists) monetary policy. When the Fed raised interest rates the government increased fiscal stimulus in the form of interest payments on newly issued treasury securities and bank reserves (which total trillions after QE). Look at the Feds balance sheet. Productivity is good because low unemployment allows workers to demand higher wages. Instead of paying higher wages capitalist will seek higher productive means. It is better in the long run to invest in more productive equipment than pay higher wages.
Mark:
So what do you suggest to get the show on the road here? So, we lay a bunch of people off due to improved throughput brought on by better technology, Do we pay them from the pile of productivity gains garnered or just whine at them due to their no longer being able to work in a job they were good at previously?
– Can we reeducate them using those funds?
– Give them a monthly stipend?
– Kick them in the pants and say “Find a damn job or get an education to get one?
– Allow the company to reap all the productivity gains from the productivity improvement?
– Make sure they have healthcare since they have no job or ability to pay for it or have lower amounts of income?
– Claim we no longer need Labor input to make this product and the company garners the funds and society picks up the tab?
So what is your plan. Labor input is typically the smallest portion od manufacturing cost. Think of the portions of it which could be paid for by the improvement in productivity (hint).