Committee Of Correspondence

Is the Economy Great or Terrible, and Who Did It?

Peter Passell
10:23 a.m.  Wednesday  9/11/96 

       I can’t resist a response to Herb Stein’s line about Alan Greenspan as Babe Ruth. Ruth was a natural athlete who cared little about refining his skills or even maintaining his health. Are we thus to presume that Chairman Greenspan is a natural prognosticator of the business cycle, a gift mere mortal economists lack? I prefer to think he is intellectually consistent, reasonably smart–which largely means he knows how to shop for good advice–and unreasonably lucky.
       To the subject of the day. Nobody knows why productivity growth has tanked since the mid-1970s and nobody knows what to do about it. The issue is a great embarrassment to the economics profession.
       That said, it is still irresistible to speculate. One clue is that productivity growth has fallen in all the mature industrial economies (including Japan), suggesting some long cycle involving the interaction of technology and business organization is at work. Another is the relative difficulty of raising productivity in services. Since most of the growth of the economy is outside manufacturing, some decline in productivity growth was probably inevitable.
       Yet another clue is the historical evidence suggesting long lags between the introduction of new technology and its impact on productivity. The disappointingly small effect of the microprocessor may be analogous to the initially disappointing impact of electric motors.
       In the absence of hard evidence on what to do about productivity, most economists would fall back on the familiar: (1) stimulate investment, particularly in human capital; (2) increase savings rates, particularly by reducing government dissaving (budget deficits); (3) cut economic regulation where the rationale for interference is not exceptionally strong; (4) target tax incentives to R&D; (5) plow ahead on opening international trade and capital markets and technology transfer.
       By my estimate, Clinton rates a C+ on his productivity scorecard. Deficit reduction good, NAFTA good, regulatory reform bad. Two points, though: (a) we probably wouldn’t know it yet if something the administration had done was working; (b) thanks to the chronic budget-deficit problem, there is no money for serious experiments in targeted incentives or investment in human capital. Alan Blinder
11:20 a.m.  Wednesday  9/11/96 

       Before moving to long-term growth, let me close the deficits-and-interest-rates debate with Niskanen. Long rates are forward looking, so expected future deficits should matter much more than current actual deficits. Bill Niskanen was at the White House in the 1980s when interest rates fell as deficits soared, and he knows the reasons. Deficits are far from the only determinant of long rates, as I noted yesterday.
       As to long-term growth, Stein is right that it is too early to say whether the poor 20-year trend has deteriorated further in the last few years. (By the way, where does that 0.3 percent rate come from? Nonfarm business productivity has grown at a 0.6 percent annual rate since 1993.) Consider:
       1. In the sector where we measure productivity best (manufacturing), there is no “Clinton slowdown” and recent years have looked quite good;
       2. In the early part of this expansion, firms lacked the confidence to hire (remember the jobless recovery?), and so output growth was built mainly on productivity (2.2 percent annual rate from 1991:1 to 1993:1) while employment barely moved (0.5 percent growth rate for payrolls). Since 1993:1, payrolls have soared at a 2.6 percent annual rate while nonfarm productivity rose just 0.6 percent. For the whole period, productivity growth is right on the (not very good) 20-year trend: 1.2 percent per annum.
       Finally, I accept Passell’s productivity scorecard, but he is sure a hard grader. I’d give the President an A on physical capital via lower deficits–despite no Republican votes, and an A on trade–pushing through both NAFTA and GATT over fierce objections from within his own party. Performance (as opposed to desires) in the other areas has been just so-so. If those get Passell’s C+, I fail to see how the overall grade cannot be much higher. As I’ve always said, politicians should be graded on the curve. Herb Stein
5 p.m.  Wednesday  9/11/96 

       Let me submit my view of the discussion of economic growth so far, to see how the panelists react to it.
       1. The slowness of the rate of growth of productivity that has worried economists since the 1970s has not gotten better in the 1990s and may have gotten a little worse. Niskanen’s demonstration that there was a sharp deterioration after the Reagan years and Blinder’s demonstration that productivity was right on track during the Clinton years depend on rather special choices of time periods and measurements.
       2. As Passell suggests, there is more in the productivity story than is dreamt of in our political economy. Or, as I once said, “Economic policy is random with respect to the performance of the economy but, thank God, there isn’t much of it.” Passell’s reference to the technological revolution now underway is, I think, very important. Bill Gates probably has more to do, for good or ill, with the growth of productivity than Bill Clinton. Anyone who has spent time sitting in front of a computer screen, as we are doing, must frequently have thought that the new technology is a drag on productivity.
       3. We can all identify government policies that we expect, on the basis of general reasoning, to have an effect on productivity, and we think that we know the direction of the effect. But Economics 101 tells us little about the size of those effects. When a number of policies are operating at once, it is hard to tell even the direction of the combined effect. Thus, we expect in general that increasing taxes should retard growth and that reducing budget deficits should stimulate growth. But we don’t know even the direction of the net effect of increasing taxes and reducing the deficit. Some will say, of course, that from the standpoint of economic growth, reducing the deficit by cutting expenditures and not raising taxes would have been the better policy. But here we run into the fact that economic growth is not everything, and if we are going to get into the business of giving grades to Presidents we cannot grade them on economic growth alone. (Implicit in much of this discussion, and loudly explicit in the campaign, is the question of the relation between taxes and growth. The Committee of Correspondence discussed this question the week of July 1.)
       4. There has been only passing reference so far to what many see as the major economic problem facing the country–the enormous increase in benefit payments for Social Security and Medicare in the next generation to which we are committed by present programs. This looms as a great threat to economic growth by generating very large budget deficits or requiring big tax increases. The grade we assign our political leaders must surely reflect the responsibility with which they recognize this problem and propose means to deal with it. So far, hardly anyone gets a high grade on that subject.
       May I direct your attention now to the issue Murray raised earlier–the apparent increase of inequality or, what is not the same thing, the decline in the incomes of some sectors of the population. How do we explain this? What public policies have contributed to it and what policies could help correct it?