SALON

Tuesday, Dec 11, 2012 11:23 PM UTC

Politico flunks economics

A new piece examining how to spark the economy reveals how stale conventional wisdom in D.C. really is

By , On the Economy

Topics: On the Economy, Jared Bernstein, Politico, Washington, D.C.,

Politico flunks economics (Credit: AP/Mark Lennihan)
This originally appeared on Jared Bernstein's blog, On the Economy.  

Reading this Politico piece about how to get the economy growing in earnest again, I was struck by how out of sync the conventional/DC story is compared to what I and other growth analysts think is going on (h/t: DS).

Here’s the agenda:

…tax reform that goes way beyond individuals and rates; much deeper Social Security and Medicare changes than currently envisioned; quick movement on trade agreements, including a proposed one with Europe; an energy policy that exploits the oil and gas boom; and allowing foreign-born students with science expertise to stay here and start businesses.

Do this and there could be not an economic recovery — but a boom, many argue.

Really?  I gotta say, I don’t see it.  In fact, pretty much everything on that list is a) conventional wisdom in DC and b) largely a distraction from where I think the evidence is actually pointing, as I’ll stress in a moment.  To be clear, raising more tax revenues and slowing health care costs are critical in terms of getting our long-term debt situation under control, and immigration reform that provides a path for folks here to stay is also a great idea.  A domestic energy boom is already underway and trade agreements do squat for growth (which doesn’t mean they’re not worth it—but their growth potential is hugely overhyped).

What’s holding back growth is inattention to the need for stimulus in the near term in an economy where monetary policy is at least partially hamstrung (zero lower bound), premature fiscal contraction (premature contraculation?), too much income and wealth inequality, and, over the longer term, the lack of a deep investment agenda in public goods, including education and worker training.

The figures here (see figs 2 and 3) reveal the decline in potential GDP—very steep in the 2000s—and the longer term weak demand problem that’s characterized the last few decades, and, of course, even more so the last few years.  This paper by John Fernald decomposes the growth slowdown into its various components, with an emphasis of productivity growth, which, as shown below, has been decidedly flat in recent years.  (Total factor productivity, or TFP, is a more comprehensive concept that the usual unit of output per hour of work; the output part is the same, but TFP includes other relevant inputs, including capital and labor quality, so it’s a much better metric for understanding growth trends; “utilization adjusted” just means adjusted for the business cycle).

Fernald identifies a slowdown in capital investment, particularly in IT, and the CBO’s analysis of this problem finds that the flow “capital services”—the pace of productivity-boosting inputs from our capital stock—increased by 4.7%/year in the 1990s and only 2.4% in the 2000s.

And remember, tax rates on such investment were considerably lower in the latter decade than in the former.  The whole “lower-taxes-on-job-creators-and-capital­-wait-for-the-magic” is a big bust.  It’s supply-side, trickle-down wishful thinking and economies don’t run on wishes.

I mentioned the need for stimulus to offset both the still-weak recovery and fiscal contraction in the near term.  Not only will that help lower unemployment and boost stagnant paychecks.  It can send critical demand signals to employers to gear up, which in turn gets investors’ juices flowing again and brings idle investment cash in from the sidelines.  There’s even, I suspect, a full employment productivity multiplier wherein employers look for cost-saving productivity gains that they’d otherwise leave on the table when there’s so much slack in the job market (and thus little pressure on wages/prices).  Yet stimulus ideas don’t even make Politico’s list!

And jeez, even if private investors’ animal spirits are in the dumps, with Treasury yields at historic lows and unemployment still way too high, is this not a great time to invest in productivity-enhancing public infrastructure?  Have you tried to get around this country lately (at least the Northeast)?  As my old WH colleague Peter Orszag put it the other day with Haiku-like precision: Treasury yields at 1.6% on one hand…Kennedy Airport on the other…doesn’t make sense.

Continue Reading Close

Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden. Follow his work via Twitter at @econjared and @centeronbudget. More Jared Bernstein.

Next Article

Related Stories

Featured Slide Shows

What To Read Awards: Top 10 Books of 2012 slide show

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 10
  • 10. "The Guardians" by Sarah Manguso: "Though Sarah Manguso’s 'The Guardians' is specifically about losing a dear friend to suicide, she pries open her intelligent heart to describe our strange, sad modern lives. I think about the small resonating moments of Manguso’s narrative every day." -- M. Rebekah Otto, The Rumpus

  • 9. "Beautiful Ruins" by Jess Walter: "'Beautiful Ruins' leads my list because it's set on the coast of Italy in 1962 and Richard Burton makes an entirely convincing cameo appearance. What more could you want?" -- Maureen Corrigan, NPR's "Fresh Air"

  • 8. "Arcadia" by Lauren Groff: "'Arcadia' captures our painful nostalgia for an idyllic past we never really had." -- Ron Charles, Washington Post

  • 7. "Gone Girl" by Gillian Flynn: "When a young wife disappears on the morning of her fifth wedding anniversary, her husband becomes the automatic suspect in this compulsively readable thriller, which is as rich with sardonic humor and social satire as it is unexpected plot twists." -- Marjorie Kehe, Christian Science Monitor

  • 6. "How Should a Person Be" by Sheila Heti: "There was a reason this book was so talked about, and it’s because Heti has tapped into something great." -- Jason Diamond, Vol. 1 Brooklyn

  • 4. TIE "NW" by Zadie Smith and "Far From the Tree" by Andrew Solomon: "Zadie Smith’s 'NW' is going to enter the canon for the sheer audacity of the book’s project." -- Roxane Gay, New York Times "'Far From the Tree' by Andrew Solomon is, to my mind, a life-changing book, one that's capable of overturning long-standing ideas of identity, family and love." -- Laura Miller, Salon

  • 3. "Billy Lynn's Long Halftime Walk" by Ben Fountain: "'Billy Lynn's Long Halftime Walk' says a lot about where we are today," says Marjorie Kehe of the Christian Science Monitor. "Pretty much the whole point of that novel," adds Time's Lev Grossman.

  • 2. "Bring Up the Bodies" by Hilary Mantel: "Even more accomplished than the preceding novel in this sequence, 'Wolf Hall,' Mantel's new installment in the fictionalized life of Thomas Cromwell -- master secretary and chief fixer to Henry VIII -- is a high-wire act, a feat of novelistic derring-do." -- Laura Miller, Salon

  • 1. "Behind the Beautiful Forevers" by Katherine Boo: "Like the most remarkable literary nonfiction, it reads with the bite of a novel and opens up a corner of the world that most of us know absolutely nothing about. It stuck with me all year." -- Eric Banks, president of the National Book Critics Circle

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 10

Related Videos

More Related Stories

Comments

 2 Comments

Comment Preview

Your name will appear as username ( profile | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

From Around the Web

Recommendations