The Academy Of Business Strategy - American Growth
An economys long-term growth potential is measured by the pace at which GDP can expand without affecting unemployment and, hence, inflation
. It is determined by growth in the supply of labour along with the speed with which productivity improves. The pace of potential growth helps determine the sustainability of everything from public debt to the prices of shares.
Unfortunately, the outlook for Americas potential growth rate was darkening long before the financial crisis hit. The IT-induced productivity revolution, which sent potential output soaring at the end of the 1990s, has waned. More important, Americas labour supply is growing more slowly as the population ages, the share of women working has peaked as has that of students whose work has fallen. Since 1991 the labour supply has risen at an average annual pace of 1.1%. Over the next decade the Congressional Budget Office expects a 0.6% annual increase.
According to Robert Gordon, a productivity guru at Northwestern University, Americas trend rate of growth in 2008 was only 2.5%, the lowest rate in its history, and well below the 3-3.5% that many took for granted a few years ago. Without factoring in the financial crisis, Mr. Gordon expects potential growth to fall to 2.35% over the coming years. That alone is grim news. But has the Great Recession made things worse?
In theory, it could do. Slumping investment may slow the pace of innovation. Soaring government debt could raise interest rates. Higher taxes, designed to reduce the debt, might dull incentives to work and invest. More regulation, in finance and beyond, could deter innovation. Workers skills may be depleted as a result of joblessness. On the plus side, well-targeted government spending on, say, infrastructure or education could boost potential output, while the huge wealth that Americans have lost may induce more of them to work for longer.
History sends mixed signals about how much these effects matter. Surprisingly, the 1930s bode well. Despite the deep slump in growth and investment, Americas potential growth rate is reckoned to have risen smartly during the decade, as innovations from nylon to synthetic rubber proliferated, while business processes were fundamentally overhauled. Alexander Field, an economist at Santa Clara University, has called the 1930s the most technologically progressive decade of the 20th century.
In the modern era Sweden offers grounds for optimism. Its productivity growth accelerated after the early 1990s financial crash, in part because the government dealt swiftly with the banking mess. Japan, in contrast, saw productivity growth shrivel in the early 1990s. Is this cause for optimism about America? Compared with the 1930s, Americas workers are more specialized, which makes it harder to shift occupation; they are also more cushioned with social protection, which reduces the urgency to adapt. Workers are less flexible because the housing bust will prevent many from selling their houses to move to where the jobs are. JPMorgan estimates that Americas natural rate of joblessness may have risen from 4.75% to closer to 6%.
Most important, even if Americans become thriftier, soaring public debt may crowd out private investment more than in Japan, which, unlike America, is a creditor country. Already American bond yields are starting to rise. Academics differ about just how much bigger budget deficits and higher public debt affect interest rates, but most agree that they do. All of these effects can be mitigated by good policies, or exacerbated by bad ones. Sensible approaches to reducing Americas long-term deficit, by tackling entitlement spending or reforming the tax code, would minimize the rise in long-term yields and might even boost potential growth. Misguided efforts to prop up declining industries or dictate lending decisions would add to the damage. America is heading for an era of slower growth. Just how much slower is still open to debate.
by: Dr. Phillip London DBA MBA FCCA
The Academy Of Business Strategy - Critical Career Skills The Academy Of Business Strategy - E-commerce Strategy Commercial Building Maintenance The Academy Of Business Strategy - Managing Change The Academy Of Business Strategy - Predicting The Future Advantages And Disadvantages Of Selling Tickets On Ebay Find Out From The Veterans How To Make Money On Ebay The Academy Of Business Strategy - Proactive Career Management Find Out Which Are The Most Popular Items Sold On Ebay The Academy Of Business Strategy - Qualifications And Experience Get Positive Feedbacks On Ebay To Attract More Customers Digital Printing Services The Academy Of Business Strategy - The Art Of Delegation