Tag: economic growth

The Boy Who Cried Wolf Was Eventually Right

“We are reaching end times for Western affluence,” warns economist Stephen King (insert obligatory horror joke here) in yesterday’s New York Times. King, who has authored a book entitled When the Money Runs Out: The End of Western Affluence, joins the ranks of economic Cassandras like Tyler Cowen and Robert Gordon, both of whom have made waves with pessimistic takes on the U.S. economy’s prospects. Like Cowen and Gordon, King couches his claims in overstatements that make it easier for skeptical readers to dismiss his arguments. Peel away the hype, though, and these growth pessmists are still fundamentally correct. The wolf really is at the door this time. In other words, the growth outlook really is darkening.

Cowen put the hype right in the title of his attention-getting book: The Great Stagnation, his term for the past 40 years or so. Of course, real GDP per capita has nearly doubled since 1973, so stagnation is obviously an inapt term. It’s true that productivity growth and growth in median incomes have slowed down, but The Moderate Slowdown is a pretty boring book title. Meanwhile, Gordon saw Cowen and raised him with the highly provocative and speculative argument that technological progress is largely exhausted and, therefore, the 250-year era of modern economic growth is winding down. You don’t have to be Raymond Kurzweil to find that contention unpersuasive.

Now King warns that Western affluence is coming to an end. Well it’s not: even if all growth stopped tomorrow, today’s advanced economies are affluent beyond the wildest dreams of yesteryear.

Push past the hype, though, and Cowen, Gordon, and King are making a point that really needs to be more widely understood: growth is getting harder for the U.S. economy, and there are strong reasons for thinking that growth rates over the next decade or two will fall short of the long-term U.S. historical average. As I explain in a new Cato paper released today, you don’t have to be a pessimist about the future of innovation to be pessimistic about the U.S. economy’s medium-term growth outlook. The main source of weakness lies in demographics: the 20th century saw big increases in both the percentage of the population in the workforce (thanks to the changing role of women in society) and the overall skill level of the workforce (thanks to a huge increase in formal schooling). The rise in schooling has slowed down considerably since 1980, and the labor force participation rate has actually been falling since 2000 (it’s now back to where it was in 1979). What were tailwinds for growth have turned into headwinds.


Immigrants Are Attracted to Jobs, Not Welfare

Unauthorized and low skilled immigrants are attracted to America’s labor markets, not the size of welfare benefits.  From 2003 through 2012, many unauthorized immigrants were attracted to work in the housing market.  Housing starts demanded a large number of workers fill those jobs.  As many as 27 percent of them were unauthorized immigrants in some states.  Additionally, jobs that indirectly supported the construction of new houses also attracted many lower skilled immigrant workers.

Apprehensions of illegal crossers on the Southwest border (SWB) is a good indication of the size of the unauthorized immigrant flow into the United States.  The chart below shows apprehensions on the SWB and housing starts in each quarter:


Fewer housing starts create fewer construction jobs that attract fewer crossings and, therefore, fewer SWB apprehensions.  The correlation holds before and after the mid-2006 housing collapse. 

What about welfare? 

Here is a chart of the national real average TANF benefit level per family of three from 2003 to 2011 (2012 data is unavailable) and SWB apprehensions:


Prior to mid-2006, TANF benefit levels fell while unauthorized immigration rose.  During the housing construction boom, unauthorized immigrants were attracted by jobs and not declining TANF benefits.  After mid-2006, when housing starts began falling dramatically, real TANF benefit levels and unauthorized immigration both fell at the same time.  If unauthorized immigration was primarily incentivized by the real value of welfare benefits, it would have fallen continuously since 2003.   

The above chart does not capture the full size of welfare benefits or how rapidly other welfare programs increased beginning in 2008.  As economist Casey Mulligan explained in his book The Redistribution Recession, unemployment insurance, food stamps (SNAP), and Medicaid benefits increased in value and duration beginning in mid-2008.  Including those would skew welfare benefits upward in 2008 and beyond, but unauthorized immigration inflows still fell during that time.

In conclusion, housing starts incentivize unauthorized immigration while TANF does not. 

Labor Day and Labor Progress

David Henderson offers some excerpts from Stanley Lebergott’s article, “Wages and Working Conditions,” for The Fortune Encyclopedia of Economics, now the 1st edition ofThe Concise Encyclopedia of Economics. They seem especially relevant for Labor Day:

Surely the single most fundamental working condition is the chance of death on the job. In every society workers are killed or injured in the process of production. While occupational deaths are comparatively rare overall in the United States today, they still occur with some regularity in ocean fishing, the construction of giant bridges and skyscrapers, and a few other activities.

For all United States workers the number of fatalities per dollar of real (inflation-adjusted) GNP dropped by 96 percent between 1900 and 1979. Back in 1900 half of all worker deaths occurred in two industries–coal mining and railroading. But between 1900 and 1979 fatality rates per ton of coal mined and per ton-mile of freight carried fell by 97 percent.

This spectacular change in worker safety resulted from a combination of forces that include safer production technologies, union demands, improved medical procedures and antibiotics, workmen’s compensation laws, and litigation. Ranking the individual importance of these factors is difficult and probably would mean little. Together, they reflected a growing conviction on the part of the American people that the economy was productive enough to afford such change. What’s more, the United States made far more progress in the workplace than it did in the hospital. Even though inflation-adjusted medical expenditures tripled from 1950 to 1970 and increased by 74 percent from 1975 to 1988, the nation’s death rate declined in neither period. But industry succeeded in lowering its death rate, both by spending to improve health on the job and by discovering, developing, and adopting ways to save lives.

And how about women?

By 1981 (the latest date available), women’s kitchen work had been cut about twenty hours a week, according to national time-budget studies from Michigan’s Institute of Survey Research. That reduction came about because families bought more restaurant meals, more canned, frozen, and prepared foods, and acquired an arsenal of electric appliances. Women also spent fewer hours washing and ironing clothes and cleaning house. Fewer hours of work in the home had little impact on women’s labor force participation rate until the great increase after 1950.

And, on real wages:

By 1980 real earnings of American nonfarm workers were about four times as great as in 1900. Government taxes took away an increasing share of the worker’s paycheck. What remained, however, helped transform the American standard of living. In 1900 only a handful earned enough to enjoy such expensive luxuries as piped water, hot water, indoor toilets, electricity, and separate rooms for each child. But by 1990 workers’ earnings had made such items commonplace. Moreover, most Americans now have radios, TVs, automobiles, and medical care that no millionaire in 1900 could possibly have obtained.

And why was there so much progress in real wages and working conditions?

The fundamental cause of this increase in the standard of living was the increase in productivity. What caused that increase? The tremendous changes in Korea, Hong Kong, and Singapore since World War II demonstrate how tenuous is the connection between productivity and such factors as sitting in classrooms, natural resources, previous history, or racial origins. Increased productivity depends more on national attitudes and on free markets, in the United States as in Hong Kong and Singapore.

Output per hour worked in the United States, which already led the world in 1900, tripled from 1900 to 1990. Companies competed away much of that cost savings via lower prices, thus benefiting consumers. (Nearly all of these consumers, of course, were in workers’ families.) Workers also benefited directly from higher wages on the job.


A Few Questions for Paul Krugman

I am not a budget expert, but I saw Paul Krugman interviewed on the PBS Newshour program last evening and had a few questions.

Here’s an excerpt from that interview:


I guess I don’t know how you can be honest about what is actually going on in this country without sounding partisan. That’s the old line, right? The facts have a well-known liberal bias, because, right now, we’re in a world where deficits are a good thing and a little bit more inflation would also be a good thing.


A proposal that’s put him at odds with the man who hired him at Princeton, Fed Chairman Ben Bernanke.

Tom Ashbrook asked him about it.


Ben Bernanke calls your proposal very reckless.


Odd, because he made the same proposal himself 12 years ago for Japan.



Those of us who have been calling for a bit more inflation are calling for 4 percent inflation, which is what we had back during the reign of Ronald Reagan in his second term. It didn’t seem that terrible to me at the time.


But we could be taking a big risk, right? You have no way of knowing whether or not the interest rate we’re going to have to offer to borrowers might change overnight, as it has often recently.


Well, I am reasonably sure that isn’t going to happen until or unless the U.S. economy is really on the path to recovery. And that’s the point also when – by the way, when I will support the austerity. Once we no longer need that support to keep the economy afloat, that’s when you do want to start raising taxes and cutting spending, but not now.

A few questions for Mr. Krugman:

  1. I don’t know whether you agree with the proposition that we’re about $100 trillion in debt, but if we were, could we really afford to postpone (again) deep spending cuts? Wouldn’t  the time for cuts be … yesterday?
  2. You say that you would support spending cuts when the overall economy gathers more strength, but isn’t the record clear that the pols have neglected to reduce spending during previous periods of economic growth?
  3. What evidence leads you to believe the pols will act differently if economic growth were robust? Wouldn’t they seek to avoid the political pain of cuts and be seduced (again) by those who say the United States can “grow our way out of the debt problem”?

Estonia and Austerity: Another Exploding Cigar for Paul Krugman

I have great fondness for Estonia, in part because it was the first post-communist nation to adopt the flat tax, but also because of the country’s remarkable scenery.

Most recently, though, I’ve been bragging about Estonia (along with Latvia and Lithuania, the other two Baltic nations) for implementing genuine spending cuts. I’ve argued that Estonia is showing how a government can reignite growth by reducing the burden of government.

Not surprisingly, some people disagree with my analysis. Paul Krugman of the New York Times criticized Estonia yesterday, writing that the Baltic nation suffered a “Depression-level slump” in 2008 and has only managed an “incomplete recovery” over the past few years.

He blames this supposedly weak performance on “austerity.”

I have a positive and negative reaction to Krugman’s post. My positive reaction is that he’s talking about a nation that actually has cut spending, so there’s real public-sector austerity (see Veronique de Rugy’s L.A. Times column to understand the critical difference between public-sector and private-sector austerity).

This is a sign of progress. In the past, he launched a silly attack on the U.K. for a “government pullback” that never happened, so what he wrote about Estonia at least is based on real events.

My negative reaction is that Krugman is very guilty of cherry-picking data. If you look at the chart that accompanies his post, Estonia’s economic performance isn’t very impressive, but that’s because he’s only showing us the data from 2007-present.

The numbers are accurate, but they’re designed to mislead rather than inform (sort of as if I did a chart showing 2009-present).

But before exposing that bit of trickery, there’s another mistake worth noting. Krugman presumably wants us to think that the downturn coincided with spending cuts. But his own chart shows that the economy hit the skids in 2008 - a year in which  government spending in Estonia soared by nearly 18 percent according to EU fiscal data!

It wasn’t until 2009 that Estonian lawmakers began to reduce the burden of spending. So I guess Professor Krugman wants us to believe that the economy tanked in 2008 because of expectations of 2009 austerity. Or something like that.

Returning now to my complaint about cherry picking data, Krugman makes Estonia seem stagnant by looking only at data starting in 2007. But as you can see from this second chart, Estonia’s long-run economic performance is quite exemplary. It has doubled its economic output in just 15 years according to the International Monetary Fund. Over that entire period - including the recent downturn, it has enjoyed one of the fastest growth rates in Europe.

This doesn’t mean Estonia is perfect. It did experience a credit/real estate bubble, and there was a deep recession when the bubble burst. And the politicians let government spending explode during the bubble years, almost doubling the budget between 2004 and 2008.

But Estonia reacted to the overspending and the downturn in a very responsible fashion. Instead of using the weak economy as an excuse to further expand the burden of government spending in hopes that Keynesian economics would magically work (after failing for Hoover and Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, and Obama in 2009), the Estonians realized that they needed to cut spending.

And now that spending has been curtailed, it’s worth noting that growth has resumed.

What makes Krugman’s rant especially amusing is that he wrote it just as the rest of the world is beginning to notice that Estonia is a role model. Here’s some of what CNBC just posted.

Sixteen months after it joined the struggling currency bloc, Estonia is booming. The economy grew 7.6 percent last year, five times the euro-zone average. Estonia is the only euro-zone country with a budget surplus. National debt is just 6 percent of GDP, compared to 81 percent in virtuous Germany, or 165 percent in Greece. Shoppers throng Nordic design shops and cool new restaurants in Tallinn, the medieval capital, and cutting-edge tech firms complain they can’t find people to fill their job vacancies. It all seems a long way from the gloom elsewhere in Europe. Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. …How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank. …that’s not exactly the message that Europeans further south want to hear. …Estonia has also paid close attention to the fundamentals of establishing a favorable business environment: reducing and simplifying taxes, and making it easy and cheap to build companies.

Good policy makes a difference. But it also helps to have rational citizens (unlike France, where people vote for economic illiterates and protest against reality).

While spending cuts have triggered strikes, social unrest and the toppling of governments in countries from Ireland to Greece, Estonians have endured some of the harshest austerity measures with barely a murmur. They even re-elected the politicians that imposed them. “It was very difficult, but we managed it,” explains Economy Minister Juhan Parts. “Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers’ salaries by 20 percent and the average civil servants’ by 10 percent,” Parts told GlobalPost. …As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection — all measures that have been met with anger when proposed in Western Europe.

It’s worth noting, by the way, that government is still far too big in Estonia. The public sector consumes about 39 percent of economic output, almost double the burden of government spending in Hong Kong and Singapore.

But, unlike certain American politicians, at least the Estonians understand the problem and are taking steps to move in the right direction. I hope they continue.

P.S. The President of Estonia, a Social Democrat named Toomas Hendrik Ilves, used his twitter account to kick the you-know-what out of Krugman yesterday. For amusement value, check out this HuffingtonPost article.

P.P.S. A few other nations, such as Canada and New Zealand, also imposed genuine spending restraint in recent decades and they also got good results.

New Study from UK Think Tank Shows How Big Government Undermines Prosperity

It seems I was put on the planet to educate people about the negative economic impact of excessive government. I must be doing a bad job, because the burden of the public sector keeps rising.

But hope springs eternal. To help make the case, I’ve cited research from international bureaucracies such as the Organization for Economic Cooperation and Development, International Monetary Fund, World Bank, and European Central Bank. Since most of those organizations lean to the left, these results should be particularly persuasive.

I’ve also cited the work of academic scholars from all over the world, including the United States, Australia, and Sweden. The evidence is very persuasive that big government is associated with weaker economic performance.

Now we have some new research from the United Kingdom. The Centre for Policy Studies has released a new study, authored by Ryan Bourne and Thomas Oechsle, examining the relationship between economic growth and the size of the public sector.

The chart above compares growth rates for nations with big governments and small governments over the past two decades. The difference is significant, but that’s just the tip of the iceberg. The most important findings of the report are the estimates showing how more spending and more taxes are associated with weaker performance.

Here are some key passages from the study.

Using tax to GDP and spending to GDP ratios as a proxy for size of government, regression analysis can be used to estimate the effect of government size on GDP growth in a set of countries defined as advanced by the IMF between 1965 and 2010. …As supply-side economists would expect, the coefficients on the tax revenue to GDP and government spending to GDP ratios are negative and statistically significant. This suggests that, ceteris paribus, a larger tax burden results in a slower annual growth of real GDP per capita. Though it is unlikely that this effect would be linear (we might expect the effect to be larger for countries with huge tax burdens), the regressions suggest that an increase in the tax revenue to GDP ratio by 10 percentage points will, if the other variables do not change, lead to a decrease in the rate of economic growth per capita by 1.2 percentage points. The result is very similar for government outlays to GDP, where an increase by 10 percentage points is associated with a fall in the economic growth rate of 1.1 percentage points. This is in line with other findings in the academic literature. …The two small government economies with the lowest marginal tax rates, Singapore and Hong Kong, were also those which experienced the fastest average real GDP growth.

The folks at CPS also put together a short video to describe the results. It’s very well done, though I’m not a big fan of the argument near then end that faster growth is a good thing because it generates more tax revenue to finance more government. Since I’m a big proponent of the Laffer Curve, I don’t disagree with the premise, but I would argue that additional revenues should be used to finance lower tax rates.

Since I’m nit-picking, I’ll also say that the study should have emphasized that government spending is bad for growth because it inevitably and necessarily leads to the inefficient allocation of resources, and that would be true even if revenues magically floated down from heaven and there was no need for punitive tax rates.

This is my message in this video on the Rahn Curve.

When the issue is government, size matters, and bigger is not better.

Does the U.S. Economy Need More Boeings or More Facebooks?

Remember the story of that once-great nation that sacrificed its well-paying manufacturing jobs for low-wage, burger-flipping jobs at the altar of free trade? At one time, that story was a popular rejoinder of manufacturing unions and their apologists to the inconvenient facts that, despite manufacturing employment attrition, the economy was producing an average of 1.84 million net new jobs per year every year between 1983 and 2007, a quarter century during which the real value of U.S. trade increased five-fold and real GDP more than doubled.

The claim that service-sector jobs are uniformly inferior to manufacturing jobs lost credibility, as average wages in the two broad sectors converged in 2005 and have been consistently higher in services ever since. In 2011, the average service sector wage stood at $19.18 per hour, as compared to $18.94 in manufacturing. (But I don’t recall buying any $25-$30 hamburgers last year.)

One reason for U.S. manufacturing wages being higher than services wages in the past is that manufacturing labor unions “succeeded” at winning concessions from management that turned out to be unsustainable. The value of manufacturing labor didn’t justify its exorbitant costs, which encouraged producers to substitute other inputs for labor and to adopt more efficient techniques and technologies.

With the superiority-of-manufacturing-wages argument discredited, new arguments have emerged attempting to make the case that there is something special – even sacred – about the manufacturing sector that should afford it special policy consideration. Many of those arguments, however, conflate the meanings of manufacturing sector employment and manufacturing sector health or they rely on statistics that don’t support their arguments or they become irrelevant by losing sight of the fact that resources are scarce and must be used efficiently. And too often the prescriptions offered would place the economy on the slippery slope that descends into industrial policy.

I recently submitted this rebuttal to this essay by an environmental sciences professor by the name of Vaclav Smil, who commits those errors. (Judging from the tone of his mostly evasive response to my rebuttal, Smil doesn’t seem to have much tolerance for views that differ from his own.) Perhaps most noteworthy among Smil’s slew of questionable arguments is his claim that manufacturing companies, like Boeing, valued at $50 billion, are better for the economy than service companies like Facebook, which is also valued at $50 billion because

[i]n terms of job creation there is no comparison… Boeing employs some 160,000 people, whereas Facebook only employs 2,000.

Granted, Boeing’s operations support more jobs. But is that better for the economy than a company that provides the same value using 1/80th the amount of labor resources? Of course not. We need economic growth in the United States to create wealth and increase living standards. Economic growth and employment are not one and the same thing. In fact, the essence of growth is creating more value with fewer inputs (or at lower input cost). Creating jobs is easy. Instead of bulldozers, mandate shovels; instead of shovels, require spoons. Inefficient production techniques can create more jobs than efficient ones, but they don’t create value, which is the economic goal.

With 2,000 workers producing the same value as 160,000 – one producing the same value as 80 – Facebook is 80 times more productive than Boeing, freeing up 158,000 workers for other more productive endeavors (perhaps 79 more Facebook-type operations). If those companies were individual countries, the per capita GDP in Facebookland would be $25 million, but only $3.125 million in Boeingia. Where would you rather live?

Smil calls my assessment a cruel joke, presumably for its failure to empathize with unemployed and underemployed Americans, by considering value before job creation.  But policies designed to encourage more Boeing’s, as Smil supports (or, in fairness, any businesses that employ at least X number of people or meet this requirement or that) would likely retard the establishment of firms, like Facebook, that produce the goods and services that people want to consume. The provision of goods and services that people want to buy – rather than those that policymakers in Washington think people want to buy (or are happy to force them to buy) – is the essence of value creation.

Thus, policies should incentivize (or, at least not discourage) the kind of innovation and entrepreneurship needed to create more Facebooks? This kind of business formation occurs in environments where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where skilled foreigners aren’t chased back to their own shores; where there are limited physical, political, and administrative frictions; and so on. In other words, restraining the role of government to its proper functions and nothing more would create the environment most likely to produce more Facebooks in both the manufacturing and services sectors.