President Trump's Economic Growth Will Be No Better Than President Obama's
The Myth About President Obama's "Failing" Economic Policy
If you listen to Fox Pundits and other conservative commentators, you would come away thinking that President Obama failed to grow the economy. The Weekly Standard almost correctly pointed out that Obama's growth, 1.5%, was half that of President Carter's four-years. 3.3% (I pegged it at 2.95%, but close enough for government work). The implication, of course, is that Obama couldn't even beat such a loser as Carter (He didn't do bad at all when compared to other presidents). They then took it a step further by comparing Obama's 1.5% to the average since 1947 ... 3.3% (I got 3.45%).
They also presented how each President from Truman on did and then showed that Obama had the worst record ... all true. But, what the Weekly Standard, and all other nay-sayers, failed to do was investigate why this was so. Well. I did and will show you that the Right is relying on "alternate facts" in their vociferous denunciation of President Obama's economic record.
What Really Drives GDP Growth in the Long-Term
A year or so ago, I read this small (685 pp) book titled Capital in the Twenty-First Century, by economist Thomas Piketty. In it he makes this claim
"Recall the g measures the long-term structural growth rate, which is the sum of the productivity growth and population growth"1
In terms of a formula this might read g = n + z where:
- g = total annual long-term GDP growth
- n = annual population growth
- z = annual productivity growth
I promise, that is as complicated as it will get in this article, although there will be a lot of data. This idea, by the way, is not unique to Piketty but is a common reality which almost all economists accept as true (after reviewing the empirical data and mathematics). Unfortunately, in political discussions, non-economists won't believe it is true. Instead, they blame President Obama's "anemic" economic growth on bad policy or doing nothing at all.
Instead, I would argue that for short-term growth results, it was the GOP's promise to thwart President Obama's every move as well as the uncertainty of what government economic policy actually is. Over the long-term, however, it is none of those but rather a result of low gains in productivity since before the beginning of the Great 2008 Recession coupled with very low population growth since the 1960s.
1 Piketty, Thomas (2014), Capital in the Twenty-First Century, Cambridge, The Belknap Press of Harvard University, p.228
The Proof is in the Pudding
TO SHOW the efficacy of our population-productivity-growth model, I grabbed some data to offer and then plot.
- The Bureau of Labor Statistics provided the average annual productivity increases for various time periods since 1947
- Annual population growth numbers came from a S&P 500 table at http://www.multpl.com/us-population-growth-rate/table/by-year
- Total annual GDP growth rates are based on data from Bureau of Economic Analysis at https://www.bea.gov/national/#gdp
For each productivity time period bucket the annualized GDP and population growth rates were determined.
The result is Table 1 as well as Chart 1.
GDP Growth vs Population and Productivity Growth
POPULATION GROWTH (%)
PRODUCTIVITY GROWTH (%)
POP + PROD GROWTH (%)
GDP GROWTH (%)
1947 - 1973 (26 yrs)
1973 - 1979 (6 yrs)
1979 - 1990 (11 yrs)
1990 - 2000 (10 yrs)
2000 - 2007 (7 yrs)
2007 - 2016 (9 yrs)
2010 - 2016 (6 yrs, US Census)
1947 - 2007 (60 yrs)
GDP Growth vs Population and Productivity Growth
The truth of the model should be obvious to even a causal glance. Clearly, GDP growth tracks very nicely with the sum of population and productivity growth. Further, the observation that this formula works better for the long-term as opposed to the short-term is borne out by the error terms on the right axis. i.e. generally speaking, the longer the time frame, the smaller the error term.
Monetary policy (that controlled by the Federal Reserve) is directed at short-term growth by dampening the wild swings in the business cycle. But it is the long-term which you, I, and the politicians should be worried about; and, based on the above, you don't need to be an economist to understand that the two levers which fiscal policy should be pulling are Population Growth Rates and Productivity Growth Rates.
Said another way, if fiscal and public policy are oriented to increasing either the population growth rate or the productivity growth rate or both, then long-term growth rates will increase above their current level. Anything less might result in a short-term bump in GDP rates, but in the long-term, they will fall back to somewhere near the sum of those two factors.
And that's a fact!
So, What Can Be Done?
As it turns out, quite a bit actually. Let's start with Population.
Why Is Population Important?
To state the obvious, it is because population growth does three critical things:
- Creates new demand
- Provides additional labor to produce supply
- Be large enough to compensate for profits 1
Simply said, without population growth (or too little) to fuel GDP growth, the economy must decline unless there is enough productivity growth to make up for the deficit
A Little History
The term "baby-boomers" should be familiar to you by now, it has been around since the 1950s; in fact, I am one. Why? Because I was born in 1947 right at the beginning of a surge in births following WW II, and latter the Korean War. The full boom was actually made up of waves of boomlets and not just the original one (sort of like earthquake aftershocks). Each boomlet was the result of each succeeding generation producing their own set of children. Because the first was so large, then the following generation was large as well. It was this dynamic that helped fuel the large GDP growth beginning in 1957. Even though the rate of births declined each generation, the original input was sufficiently large and long that the next few generations, when added to the previous ones kept the overall birth rate growing.
This cycle repeated itself year after year until 1964 when the cumulative birth rates started falling. By 1972, the children of people born in 1952 or so stopped having enough children to replenish those who died; that number is thought to be about 2.1 live births per woman. In other words, to keep the population growing, each woman, on average needs to produce enough kids to replace herself and the father, plus a little bit. Well, after 1972, that stopped happening. A look at Table 2 will show that America is in what we Vietnam vets call "deep kimchi"
1 "Profit" is what makes capitalism great. It provides the motivation for entrepreneurship and the means to grow businesses. It is also capitalism's own death warrant, if not properly managed.
- Too little population/productivity growth, then profits eat up the resources needed to pay for labor and materials
- Not regulated properly, profits allow capitalism to devolve into monopolies and oligopolies, both of which destroy the concept of free-market.
Historical U.S. Total Fertility Rates (TFR)
Low Point of Great Depression
Near End of Baby Boomer Era
Middle of Oil Crisis
CIA Estimate, a Historic Low
Fortunately, in 2016, we are still living off of the fat of the baby boomer period (called Population Momentum) ... and increasing numbers of immigrants, both legal and illegal, coming into America. The reason immigrants are so important is that at least in the first generation, their fertility rates are much higher than native born Americans.
Clearly, left to our own devices, our population will begin to actually decline in another three or four generations - and our economic growth along with it (unless, of course, there is an offsetting increase in productivity growth).
That leads us to our first Public Policy action we can take to help reverse the inevitable - increase immigration.
Ellis Island - 12 Million Immigrants Flowed Through Here
What's Immigration Got To Do With It?
Everything, as we just saw. Because native born residents do not produce enough progeny to replace all those who die, at least since 1972, the only source for "new blood" are immigrants (legal and illegal) to America. Further, to be helpful, they would need to arrive in sufficient numbers to compensate for the 0.43 deficit in fertility rate.
According to a Pew Research study 2015 - 2016 was a watershed year. That was the year when the population of people who were born to parents also born in America began declining! Yes, that's right, it was only a short two years ago (if you are reading this 2017 or 2018) that America's (like Russia) is actually getting smaller!! And, unless productivity or immigration picks up substantially, economic growth will be minimal.
If it were left to solely to productivity growth (meaning the nativists currently being represented in the White House, get their way with immigration and population growth drops to zero), then productivity would have to grow at 3.5% or more annually over the long-term to meet President Trump's lowered target of 3% (down from his campaign promise of 4%). Here is the problem ... productivity growth in America has not been that high since at least WW II. So that doesn't seem like a viable option.
On the other hand, if it were left to population growth (keeping productivity constant) to grow the economy, then the population would need to grow at roughly 0.71% annually. Unfortunately, our population (including current immigration numbers) is only at 0.41% annually (from Table 1) and getting worse! If the current political majority is successful, immigration will be curbed, and the race to less population growth will only accelerate.
So how many new immigrants a year do we need to maintain a population growth of 0.71%? Well, if my math is right, about double the amount arriving on our shores each year. In approximate numbers there are about 1 million new immigrants coming in a year. But to push our growth up to 0.71% from 0.41%, another 950 thousand will need to join us each an every year. Worse, if our native born growth rate keeps declining, even more immigrants will be needed!
But, under our current political environment, that is not going to happen, is it.?
Do You Agree?
I claim (and hopefully proved) that long-term economic growth is tied closely with growth in population and productivity. Do you agree?
Whenever I raise this point in other discussions on Hub Pages or in social media, I get slammed by the Right (and sometimes by the Left, as well) telling me I don't have a clue what I am talking about. "If that is true", I respond, "then the vast majority of economists don't know what they are talking about either". What do the nay-sayers offer in return? Normally, whatever is the solution du jour being bandied about in the media (save for media that take a deep dive into economics). Never do they point to the real drivers of economic growth ... productivity and population.
Having said that, if we just focus on the short-term, some of the things the nay-sayers offer actually will work ... in the short-term. There are clearly certain monetary (Fed) and fiscal (Congress) polices that can be followed which will often increase economic growth for a little while, but the growth will soon reside. Also, if Congress or the Fed (or both, as in the 1999 - 2006 lead-up to the Great Recession 1) go overboard in trying to making growth happen then the crash that certainly will follow can be quite serious.
Today, the solution from the GOP is to 1) stop multi-lateral trade deals, 2) cut taxes for rich, 3) kill domestic spending, while expanding defense spending), 4) repeal (and maybe replace) Obamacare, 5) decrease legal and illegal immigration, 6) stop addressing the inevitable effects of climate change, 7) deregulate the financial sector and anything else they can, 8) institute a public-private toll/fee based infrastructure initiative, and other things along these lines.
Only a few of these address the long-term problems of declining population growth and anemic long-term productive growth. Those would be #5, #6, and #7. The rest will have a short-term, and mostly depressing impact. Let's discuss the three I pointed out for a moment.
The plan, if you listen to the campaign promises of those in charge right now (there is no real plan yet), is to kick the 12 million illegal immigrants out of the country and decrease the number of legal immigration to the US 2. That, as we saw above, will lead to a rapid decline in population growth since immigration is the only reason our population is currently growing. Either one of these two programs, if successful, will depress future economic growth in America.
Ignoring Climate Change
Everything real climate scientists know about climate change points to huge costs, both business and social, if their warnings are ignored ... which is the current mindset of President Trump, his administration, and the GOP. We know from history that it won't be until disaster happens that these people will grudgingly come around and support much more costly initiatives to limit the damage. How does this fit in with my argument? Because, every dollar business spends on repairing the damage caused by climate change and every person hired to do the repair work will lower productivity.
Of course, the nay-sayers will point out this truth applies to today as well. They will say by trying to fight the rise in greenhouse gases will also lower productivity today. And you know what? They would be right! BUT, which would you rather have, productivity lowered 0.2% annually today or 10% 20-years from now? (the numbers are for demonstration only) I know my choice, what is yours?
It is true, but I know few will believe me, the primary reason governments in a free society like ours make laws is to mitigate damage already caused by others, be they individuals or business entities. Think about it, probably 95% of all laws and regulations have been created because one entity was harming one or a million other entities already and probably for a long time.
The best modern example is President Nixon's Environmental Protection Agency (EPA), which is currently in the process of being neutered by President Trump and Director Pruitt. The reason the EPA was created was to combat pollution of all types because industry would simply not police themselves. And the massive push-back (similar to what climate change is facing today) Nixon received made It was clear that short-term profits were more important to business (and the politicians that support them) than the health of our people and the environment we live in.
After the industrial revolution of the 1800s, productivity (output per unit of input, be it labor or robot) increases were enormous. Part of the reason is companies didn't have to spend part of their resources on not polluting the environment. As a result, cities disappeared under a layer of smog (which I personally observed in my lifetime), lakes and rivers were poisoned, forests were clear-cut with no reforestation, poisoned river waters made it into the food chain, and many other crimes against humanity. Industry had every incentive not to do a thing about it because it would decrease productivity and therefore their profits. Over time, "incentives" were built into laws and implementing regulations which resulted in remarkable, but expensive improvements in our environment; it also depressed productivity.
President Trump and the GOP are trying to reverse this trend by killing many regulation designed to keep our environment livable. Should they succeed, productivity will increase for awhile (because less "inputs" are needed to keep the earth safe). But the cost, of course, is an earth where it is not healthy to live as well as orders of magnitude more cost to clean it up later.
Another set of regulations designed to protect Americans from corporate malfeasance are those controlling the financial sector. Most were put in place after the Great Depression of 1929 (you have to give a year because there have been around five other great depressions in our history); Roosevelt and the lawmakers wanted to prevent a repeat performance. This worked well until 1999 when the GOP Congress and President Clinton decided these laws weren't needed any more. Between then and 2007, most of the regulations designed to prevent a major recession or depression were sent to regulation heaven. That set the stage for the next major recession in 2008. One consequence of this recession was a major drop in productivity.
In its aftermath, new laws were created such as the Dodd-Frank Act and the Consumer Protection Agency. On the chopping block in the new Trump administration are these same laws whose purpose is to prevent another 2008 Great Recession.
Productivity increases, therefore, are directly tied to deregulation as the inputs these regulations require begin to decrease as Corporate America starts to do the bad things these regulation prevented. So yes, deregulation can increase long-term economic growth, but at what cost?
1 According to the official Financial Crisis Inquiry Report, the two overarching causes of the Great 2008 Recession are 1) fiscal and 2) monetary policy mistakes. In the first case, congress, controlled by conservative Republicans, in keeping with their economic philosophy, carried out a major deregulation of financial industry. (Yes, President Clinton did sign the most important piece of deregulation which rescinded the 1938 law created to prevent what happened a decade later). The latter mistake was Fed Chairman Alan Greenspan's mistaken belief that in abnormal times, markets are self-correcting; he admitted this mistake near the end of his term.
2 Surveys show that modern immigration demographics lower the average age of America's population (a good thing) as well as increase the number of married couples in the US (also a good thing).
Making the Population and Productivity Grow
There are two avenues the government can follow to reverse America's declining population and the consequential decline in economic growth. One is to increase the birth rate of native Americans while the other is to increase immigration. Obviously, the latter is much easier to do than the former.
Immigration control is a matter of legislative action and good planning. America has a long history of increasing and decreasing immigration rates; sometimes for good economic reasons and others due to a rise of nativism in American politics (which is what we are seeing today). It is as simple as recognizing the need for immigration and changing our laws to encourage it.
Harder is getting Americans who are already here to have more babies. Clearly the government can't order people to have or not have babies in the manner that China has. But it can incentives parents to have more children. One possible way, among many, would be to give a tax credit (not exemption) for the third child. Why do I say the third child? Because if the birth rate increased just that little bit, our population would grow rather than decline as it is doing now.
One cause of lower productivity which I haven't mentioned yet is income inequality. The reasoning follows common sense in two related areas. But first consider Chart 2 below.
What Income Inequality Looks Like
So what are some of things that drive income inequality? The first is executive salary. Compared to the time when America experienced good productivity, executive salaries were not out of proportion to other company expenses. Since 1982, and the Reagan tax "cuts", executive salaries have exploded. Since then, more and more dollars have been diverted to compensation well in excess of that needed to maximize productivity from management actions. Consequently, each dollar spent on these huge wages (inputs) will decrease productivity if output does grow proportionately.
Likewise, these huge pay packages also take money that could otherwise go to the line worker (or automation), you know, those people who actually produce the output. It is that dynamic which makes Chart 2 look the ways it does with the top 5th taking a larger and larger share of total income. At the same time, the lower three rungs are obviously losing income share. That ever widening gap is Income Inequality.
Since the Great Recession of 2008, blue-collar wages have been suppressed while white collar wages have sky-rocketed. It should be no surprise to anybody that the worse the working conditions and/or the worse (perceived or real) the wages, the less incentive people have to work efficiently and effectively. This, of course, must end up in a decrease in productivity; and therefore economic growth. Today, most workers at large corporations understand very well they are not appreciated nor paid their actual worth while their bosses are paid more than they deserve. How do they see this? Because their CEOs make 300 to 400 times what they do when back in the 1970s, it was only 25 times as much. Bottom line, why should they work hard?
Finally, another way to increase productivity (without ruining the environment) is automation. In fact, automation is the reason productivity grew through the 1990s, up to the Great Recession. There are downsides to automation however, the main one being the loss of jobs tied with the lack of education to obtain others.
I Hope I have made a good case that the true targets of fiscal and social policy must be population and productivity growth if America ever hopes to get to regain its former economic glory. It is clearly an achievable goal, but to attain it, the public needs to understand it and elect those politicians who understand it as well.
But given the vast partisan divide, the lack of understanding on how the economy really works by President Trump and the ruling party1 as well as the minority party's inability to connect with working America, then the likelihood of good economic growth is out of our reach for the foreseeable future.
1 Once upon a time, back in the 1960s and 70s, the GOP actually accepted Keynesian economics and the need for long-term planning.
© 2017 Scott Belford