GROWING, GROWING, GONE?

He looked at us, Dean and me, with an expression that seemed to say, “Hey now, what's this thing we're all doing in this sad, brown world.” ~ Jack Kerouac, On the Road

We’ve barely begun to travel on the president’s road to alleged greatness and it has already turned into quicksand.

Mostly because of the president’s flurry of ukases – aka, executive orders (EOs) – that have closed our borders in the guise of “national security” and begun to dismantle the Obama accomplishments. These executive orders are not like those of the past. They appear to be uncoordinated, skeletal, rushed tweet-like summary statements rather than well-considered, substantive pronouncements, as past presidents’ ones have been. No real core, no measured assessment, no pre-coordination with affected agencies; nothing but a glorified headline press release that employees of executive agencies have to guess what they mean and what they’re supposed to do as a consequence. Pundits have told us that DJT “thrives on chaos;” now we’re all suffering from it; wondering how to make “You’re fired” mean something.

At this point, the prime example is he-who-must-be-named Micro-Man’s Jan 27 EO on immigration that indefinitely barred Syrian refugees from entering the United States, suspended all refugee admissions for 120 days and blocked citizens of 7 Muslim-majority countries, refugees or otherwise, from entering the United States for 90 days.

This decree has unleashed confusion and turmoil throughout the immigration system, including airports in the US and overseas. It prompted protests and legal action. Emigrating Christians appear to be spared these administrative shackles that seem only applicable to Muslims, despite frantic counter-statements by the president’s embattled cohorts. Ah, chaos.

But let’s travel on the road beyond SFO, LAX, OGG and JFK and head to making America great again through Micro-Man’s promised, magnified economic growth.

A large part of post WWII American greatness is tied to our impressive macroeconomic growth. In real (inflation-adjusted) terms, our 2016 GDP is almost 4 times larger than it was 50 years ago, quite an accomplishment, which averages to yearly growth of 1.4% through the ups and downs of our last half-century of business cycling. The chart below shows annual real GDP growth for each president since Reagan in 1981. The growth rates for the two most recent presidents, Barack Obama and George W. Bush, are noticeably lower than that of either Bill Clinton or Ronald Reagan. Where has all our growth gone?

Source: Bureau of Economic Analysis

Micro-Man has stated that as president he will oversee “tremendous” economic growth. In September 2015 he said, “We're looking at a 3%, but we think it could be 5%, it could even be 6%.” Twelve months later his campaign estimated that the economy would expand at an annual rate of between 3.5% and 4%, following his proposed overhaul of the tax code. Then one month later, during his Las Vegas debate with Hillary Clinton, he tenaciously doubled down on producing increased annual GDP growth, “I actually think we can go higher than 4%. I think you can go to 5% or 6%.” After his election victory, Steven Mnuchin, who DJT has nominated to lead the Treasury Department, and be responsible for implementing the president’s economic agenda, backtracked on his boss’s Olympian growth goals, and stated in an interview, “I think we can absolutely get to sustained 3% to 4% GDP [growth], and that is absolutely critical for the country.”

Because so much depends on it, I hope our economic growth will increase, but seriously doubt it can happen at the fantasy-levels of 5% or 6% per year, given the policy ideas DJT and real Republicans have already declared. For some perspective, even 4% annual nominal GDP growth means the US would need to add $754 billion – slightly larger than Turkey’s GDP (ranked 18th largest in the world, with a population of 80.3 million) to our GDP. That yearly increase would be a very heavy lift and require policies that will not be considered even in a tweet by Micro-Man.

Economists generally agree (I know, I know, it’s almost oxymoronic to state that economists agree on anything, but…) that sustained macroeconomic growth requires increases in the number of employed workers, increases in capital stock (e.g., factories, machinery and equipment), increases in labor and capital productivity (aka, total factor productivity) and technological advancement.

By examining each of these key drivers of growth during the recent past, we reach a somber conclusion: US macroeconomic growth will not soon increase from the most recent 1.5% to 2% annual rate to even 4%. If Republicans reduce government support services as expected, this will mean serious economic challenges for millions of Americans that have nothing to do with growth. 

Increases in the number of employed workers will fall due to policy and demographics. Donald Trump and his Republican supplicants are all too busy denying visas, closing borders and building walls that will prohibit immigrant labor – be they unskilled, semi-skilled or those with H1B visas – from entering the US. The rising retirement of Baby Boomers means the number of US laborers will be barely growing, despite Millennials’ additions. The labor force is anticipated to grow at an average annual growth rate of just 0.5%, from 2014 to 2024, the lowest in several decades. The US total fertility rate now is at its lowest in a long time – 1.87 children per woman. So much for expecting the number of employed workers to increase. More positively, the US capital stock has steadily increased for decades. The St. Louis Federal Reserve Bank estimates in 2014 that the US capital stock was $51.2 trillion. But capital stock increases alone cannot pull growth rates up.

Total factor productivity (TFP), which combines productivity changes in labor with that of capital, has been growing at a smaller rate than previously. Over the past four quarters ending in the third quarter of 2016 the Federal Reserve Bank of San Francisco calculated that TFP grew at a diminutive annual rate of just 0.32%. Because TFP encompasses the benefits derived from technological improvements, economists believe it is a central source of growth within an economy. So the decades-old reduction in productivity growth is a significant and puzzling concern for economists and policy-makers, excluding today’s president.

One likely drag on productivity growth is the enduring reduction in government-funded non-defense R&D spending. The Obama administration’s proposed FY2016 budget called for a modest increase in R&D funding over last fiscal year. This proposed budget now is no longer relevant and a new, summary one may be produced by the new president. Outlays for all R&D would have represented 3.5% of all federal spending in FY2016, continuing a long decline.

Professor Robert J. Gordon has made a compelling case that the days of 3% to 4% annual growth for the US are behind us. Historic growth rates are gone. His captivating book, The Rise and Fall of American Growth, comprehensively documents the reasons for his dour prognosis. Prof. Gordon’s calculation of total factor productivity shows that for the decade ending in 2014 the annual change in TFP was a small 0.7%, the second smallest since the decade ending in 1930. There are 4 general reasons, which Prof. Gordon labels “headwinds,” that are now flying in the face of growth. They include rising inequality, poor-quality education, our aging population and rising government debt that can reduce productivity gains relative to increases in people’s standard of living. He forecasts that average growth in real income per person over the next quarter-century will be a minute 0.7% per year—almost one-half the already-small 1.3% per year rate realized in the 2000–2015 period.

Thus, looking at the near future, it’s unlikely that US economic growth can rise to historic levels, say even 3% per year. It’s gone unless public policies are enacted to reduce inequality, improve public education, increase labor-force size and participation and reduce government debt including the oncoming onslaught of baby boomers’ Medicare/Social Security transfer payments. If enacted, such policies could increase productivity and standards of living. But they won’t be by Micro-Man. His flighty day-by-day policy agenda offers no hope of that happening. It’s likely we’ll revert to Kerouac’s sad, brown world with unknown, unintended consequences.

THE TIME OF TWO

Time is the longest distance between two places. ~ Tennessee Williams     

The only two things that scare me are God and the IRS. ~ Dr. Dre     

It’s now the time of 2. The numerical system that we all use was developed by Hindus in India between the 1st and 5th centuries. Later, the Persians and Arabs adopted it and spread it to the West during the Middle Ages via trade and commerce. Thus, we have been using the number 2 for many centuries as part of the Hindu-Arabic numeral system.

Number 2 is important in a variety of ways: our brains have 2 hemispheres; Cartesian geometry (as you remember from high school, with its 2-phase (x,y) coordinates) has played a large role since the early 17th century in learning about how the world works; the binary (base-2) numeral system is the core of all electronic operations (how smartphones and computers do their stuff); when using it as a divisor, it neatly produces the fundamental dichotomy of odd and even integers; it’s the first even number; it’s the smallest and only even prime number; and it’s the first “magic number” in physics.

The number 2 has recently become unexpectedly present in many diverse policy discussions. A numerical conundrum? Hardly, it’s no longer just Tea for Two or the number needed for tango-ing. It’s our economy and global policies adhering to the power of 2 in several interesting, hopefully not too tumultuous ways. Here are four (4) examples of the seeming primacy of number 2; that’s two-squared and 2x2 examples.

The first 2: GDP growth.  The Bureau of Economic Analysis recently determined that during the 3rd quarter of 2015 our real GDP grew at a meager 2%. And, between 2010 through 2014 the real US GDP grew at a miserly 2% per year. This 5-year period spans our not-so-great expansion following the Great Recession. Although better than 1.9% growth, 2% yearly growth is hardly heady. Regrettably it’s a lot less than the 4.1% average annual growth rate the US economy enjoyed from 1995 to 2000. I’ve talked before about several of the reasons for this frail growth.

The second 2: target inflation rate.  The Federal Reserve has an almost fixed-in-concrete 2% target for national inflation (the annual rate of change of prices for all goods and services). It turns out the Reserve Bank of New Zealand, its central bank, pioneered inflation targeting in 1990. In 1997, the Kiwis’ central bank was the first to adopt a 2% target inflation rate. The Federal Reserve announced its inflation target 13 years later, in Aug. 2003. In Jan. 2012, the Fed set its inflation target at 2%, where it remains. Actual inflation this past year in our country through Nov. was 0.5%. The 2% inflation target is internationally contagious. There are now at least 13 nations that have stated their target inflation rate is 2%.

The third 2: government bond rates.  On Dec 18 the interest rate on a 10-year US Treasury note closed at 2.2%. They have hovered around 2.2% since Dec. 1. For some international perspective, on Dec. 30 other nations’ 10-year notes’ interest rates ranged from -0.062% for Swiss bonds to 16.27% for Brazilian bonds. Yes, this Swiss interest rate is negative, indicating that purchasers actually pay money to buy the bond. Euro-bonds’ interest rates are also negative to defend their economies from slipping into deflation. Brazil is in the midst of a significant crisis of confidence with the government, has growing public debt, falling GDP and 2-digit inflation. It’s not at all a good economic place to be, as reflected in that 16.27% interest rate, which is over 8% higher than even Greek bonds. BTW, before last year Brazil’s economy had grown at 2.2%. It’s hard to get away from 2s.

The fourth 2: global warming threshold.  2^o Celsius is the declared upper limit of global warming. The earth’s temperature needs to not increase beyond 2^o C more than its pre-industrial average in order to prevent ruinous environmental damage. Since 1880, the earth’s average temperature apparently has increased 0.82^o C. An ever-expanding number of people accept this number 2 and are establishing public policies that recognize our collective responsibility to halt the climb in global temperatures. For example, see the Dec. 12 environmental accord reached in Paris by over 190 nations. This agreement is a necessary but insufficient step for curtailing environmental calamity. The sufficient step – and a tall order – is instituting a uniform, meaningful carbon consumption tax. Some scientists suspect this accord unfortunately offers 1-degree of separation from the 2-degree ceiling. These pessimista scientists expect the Paris agreement will allow a 3-degree rise in temperature. Given the sizeable uncertainties about the agreement’s policies, and the future, it’s hard to agree or disagree with this criticism.

It’s an altogether different issue to have reservations about the accuracy of the now thoroughly-institutionalized 2-dgree limit itself, which is based on intricate, very long-range weather/climate models. I’ve previously mentioned these reservations. Nevertheless, the 2-degree goal is a worthy one. As Thomas Friedman mentioned in a recent column, “Dinosaurs didn’t believe in climate change either.”

So these four 2s provide a fine foundation for economic and environmental policies in the US and beyond. Four 2s is an impressive poker hand, only beaten by a straight flush or holding four 3s through aces; a probability of 0.196%. Moreover, in terms of macroeconomic indicators GDP growth, inflation and bond rates carry significant authority for any modern nation. When each of these formidable gauges rolls a 2, it’s both odd and an extraordinary numerological event. Should we consider these four 2s two-timers? Not at all, so enjoy it while it lasts. Happy New Year!