The popular aphorism that is commonly attributed to Mark Twain is a reminder that anyone can prove almost anything by incorrectly citing figures. The most recent example of this in practice? A recent op-ed post in the Wall Street Journal by Phil Gramm and Michael Solon entitled “Finding America’s Lost 3% Growth.”
Gramm and Solon argue that historically the American economy had had real growth of 3% for decades and that without this level of growth the American Dream can no longer be a reality. Pinpointing the root the of the current sub-3% growth of the economy, the authors say,
“Did America actually experience 3% real growth to start with? Yes. In the postwar era, the U.S. averaged 3.4% annual growth from 1948 through 2008. We averaged 3% growth for half of the George W. Bush presidency (2003-06). From 2009-12, the Obama administration, the Congressional Budget Office and the Federal Reserve all thought they saw 3% growth just around the corner. If the possibility of 3% growth is gone forever, it hasn’t been gone very long.”
What exactly happened during the Obama administration to impair growth to such an extent? Greater regulatory burdens and disincentives to work. Regulations burdened banks, energy companies, and the healthcare industry and caused productivity growth to plummet. Meanwhile, making welfare requirements more liberal and disability easier to collect, the available labor force shrunk.
Those disagreeing with is narrative are “growth deniers” and grasping at straws to defend Obama’s economic legacy.
To analyze these claims, we should first look at the broad data in order to gain some context. The chart below shows real GDP since 1948 as well as the five year moving average of that growth. America did indeed grow at a trend of 3% for a very long time, but that trend changed much earlier than Gramm and Solon admit to – growth began receding in the 2000-2001 period.
The statement that growth that was 3% in the first part of the Bush administration is a galling misuse of statistics. It is now clearly evident that excessive debt was piling up during the period, making the economy borrow growth from the future and reporting headling figures above the true underlying trend.
So, what did happen in the period around 2001 that decelerated GDP growth? That was basically the near-term peak in productivity growth, which has been shrinking ever since.
Northwestern economist Robert Gordon has discussed falling productivity growth levels as well as expectations for continued weak productivity growth since at least 1990. Just because we consider it our birthright to grow at a certain rate does not mean that it is. Gordon points to innovation in how we live that was monumentally historic and can never be repeated – the car, electricity, indoor plumbing, the electric grid – these innovations made our material lives far better and took several decades or more to propagate through the economy and boost productivity levels. Productivity growth stalled out before from the 1970s through the 1980s, but then temporarily went back higher thanks to the information technology revolution. By 2001, much of the benefit of those gains were absorbed.
Clearly, the narrative that Barack Obama strolled in the White House and economic dynamics changed does not hold up to scrutiny. But, what of Gramm and Solon’s individual gripes with Obama’s economic performance? First, how about the labor force participation rate? Again, it is pretty easy to see from the data that declining labor force participation did not begin post-recession.
The reason for the long decline is not agreed upon by economists. Demographics have clearly played a role but can not account for the full drop. The most likely culprit is a skills mismatch between men in their prime working years and the type of work the economy now demands.
And increased regulation? There were areas of the economy that did get more regulated, but the evidence is weak that this led to some kind of economic malaise. Did banks really lend less because of compliance headaches? No, they lent less because of less credit-worthy borrowers and a desire to build capital strength. Energy production soared over the past decade as well, despite any additional energy regulations.
This does not mean there are not things that can be done to boost growth or increase investment. But, it does mean that no matter what we choose, we are likely going to be left with growth that is less than 3% per year. Robert Gordan himself estimates long-term growth to trend at 1.6% in the near future. That lower growth may be a reality, but it’s nobody’s fault.
Count me among the ranks of the “growth deniers.” Or at least those with the capacity to accurately present data.