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Home Publications Blogs Beat the Press The Washington Post Is Trying to Scare You, Again

The Washington Post Is Trying to Scare You, Again

Thursday, 15 November 2012 15:41

I'm not kidding, that's the headline of a blog post:

"this graph should scare you."

The Post reports on a new study from the Congressional Budget Office (CBO) which shows that GDP growth in this recovery has been considerably weaker than the average of prior recoveries. It's not entirely clear why the graph from CBO is supposed to be scary. After all, don't most people already know the economy stinks?

And the reason is pretty simple, we don't have any source of demand to replace the $1 trillion or so of annual construction and consumption demand that was generated by the housing bubble. So CBO's graph doesn't seem to be giving us any new information.

Perhaps we are supposed to be scared by CBO's assessment that two-thirds of the reason for slower growth is slower potential GDP growth, with only one-third is due to slower demand growth. This could be seen as somewhat scar. After all, if the economy really has much less growth potential that would be bad news, but on closer inspection there is not much "there" there.

Half of CBO's estimated slowing of potential GDP growth is due to slower labor force growth. This is the story of the retirement of the baby boom cohorts. As a baby boomer who one day expects to retire, this never struck me as especially scary and it certainly is not news. Everyone other than former Senator Alan Simpson (who seems to have first discovered the baby boom cohort when he sat on President Obama's deficit commission) knew that we would have a big wave of baby boomer retirements about 50 years ago.

We have two stories here. One is slower population growth. This pays us all sorts of dividends in reduced crowding and less pollution which are mostly not picked up in GDP measures. While some folks around this town (Washington) go nuts over slower population growth or, even worse, declining populations, I consider this outcome as 100 percent positive. (It is not good if people who want children feel that they are unable to afford them.)

The other story is a rising ratio of dependents (retired and young) to workers. This is somewhat of a drag on living standards, but hardly a disaster. The graph below shows the projected negative impact on after-tax wages of the increase in the ratio of retirees to workers compared with the positive impact of various rates of productivity growth.


Source: Social Security Trustees Report and author's calculations.

Are you scared yet?

Okay, the demographic portion of CBO's calculation may not be especially new or scary, but what about the remaining third of the total gap that is due to other factors? It turns out that half of this hole is due to less capital. In other words, because companies invested less in new plant and equipment in the last five years than they did in the pre-recession period, productivity growth increased less than would otherwise have been the case.

That really shouldn't scare us too much. One of the main determinants of investment is demand growth. In other words, if we had done something to maintain demand (e.g. big stimulus program, lower trade deficit etc.), we would have seen more investment. Therefore we would not have seen the slowing of potential GDP due to a slower rate of capital accumulation.

If we can calm ourselves about the drop in investment, this leaves the remaining sixth of the gap. This one is due to slower multifactor productivity growth. That is amount of growth that is attributable to better technology or the better organization of the production processes. 

There are two points to be made here. The first is that measures of multifactor productivity growth are horrible. The reason is that it is a residual. We look at GDP growth, calculate the amount that can be explained by increased labor and capital and then attribute the difference to multifactor productivity growth.

Over the last decade, measured multifactor productivity growth has averaged just over 1.0 percent annually. Suppose that when we get our revised data for GDP we discover that growth has been revised up by an average of 0.2 percentage points, a not especially large revision. This would boost our measure of multifactor productivity growth by 0.2 percentage points, or 20 percent. 

Can this happen? It is certainly possible. Will it? We'll see when get the revisions to GDP data, which may even go the other way. The point is that this measure is extremely erratic and it would be silly to get too worried about a modest fall or rise over a relatively short period of time.

The other point is that even if the drop in the pace of multifactor productivity growth proves to be real, it would have had only one third of the impact on economic growth in this cycle as the drop in demand. (I have flipped the lost productivity growth due to slower investment to the demand side.) This would still mean it should be some cause for concern (hey, who wouldn't like more mulitfactor productivity growth?) but makes it considerably less important than generating the demand needed to bring the economy back to full employment.

For these reasons, CBO's story of slower potential GDP growth doesn't scare me. The fact that we lack the political will to take the steps needed to bring the economy back to full employment does. 

Comments (9)Add Comment
written by Ron Alley, November 16, 2012 5:42
Some once said a crisis is too great an opportunity to ignore. The Republicans are self-starters. If a crisis fails to occur naturally just start one. Who do you get to start a flood anyhow?
written by bakho, November 16, 2012 7:47
If declining workforce is a problem, simply increase immigration, especially those who want to come to the US and start businesses, including doctors and other medical professionals who are in short supply.
New Standard of Scary: Either Way, Too Much or Not Enough is Scary
written by Last Mover, November 16, 2012 8:33
... this recovery has been considerably weaker than the average of prior recoveries.

Seems just yesterday Mary Matalin was on a TV panel trying to scare everyone into believing Obama was an abysmal failure for not achieving a V-shaped recovery after which she was corrected by Paul Krugman.

Of course if Obama had achieved a V-shaped recovery with sufficient stimulus Mary Matalin would have appeared on the same TV panel claiming the increased deficit necessary to finance the stimulus would fail and backfire in the near future. And as before she would be corrected by Paul Krugman.
What is really scary....
written by Mcwop, November 16, 2012 10:00
....is that we need to be running deficits of about 15% of GDP (at least) to get this thing moving again. But Dems and Reps are both focused on cutting spending.
written by bmz, November 16, 2012 10:49
What is really scary is Mary Matlalin on TV.
written by skeptonomist, November 16, 2012 10:58
The basic numbers are illustrated in a simple way with some graphs at the St. Louis Fed site (FRED). Total private investment dropped by about $800B in the recession (google FRED GPDIC96). About half of this was housing (PRFIC96). Non-residential investment (PNFIC96) has actually been recovering at a reasonable rate, as fast as after the 2001 recession. Note also that housing dropped starting in 2006, so it was leading the way into the recession. It has been stuck at under half the pre-recession rate and has only showed signs of life very recently.

As Dean says most of the story (though not all) is the crash and non-recovery of housing. Of course it would be stupid to build up a new housing bubble, but there was a lot that could have been done from early days in clearing up the foreclosure mess. Basically this would have involved forcing banks to swallow losses, which in effect would be a transfer of money from big banks to consumers, just what the economy needed and still needs. Bailing out the banks preserved their political power and enabled them to block constructive action.
the "recovery"
written by mel in oregon, November 16, 2012 12:54
47 million people are on foodstamps, homeowners have lost 40% of their net worth, so good luck baby boomers with your retirement. so the only difference between today & 4 years ago is the stock market is doing fine, & wallstreet has added more multi-billionaires. for everyone else there is no recovery.
Referencing to an earlier bubbled economy's full economy seems flawed to me
written by John Wright, November 16, 2012 2:25
There seems to be a recurrent reference to earlier and assumed better times in which a bubble led to job growth and apparent economic growth.

As possibly the arrival of Sandy indicates, growth in the world economy doesn't pre-fund the cost of negative consequences, such as climate change, that may be a direct result of economic activities.

If we ratcheted down our expectations of what the USA economy SHOULD do, perhaps we would move toward reduced work weeks and full employment for all and lower, and more efficient, consumption of resources.

We may be in a world where increasing economic growth and population growth only decrease lifestyle.

Unfortunately, the USA political class, at all levels, Federal, State and local, is oriented toward economic and population growth, and the messages is always "grow the pie, don't slice it more reasonably".

Let's make a new rule for the new year!
written by bailey, November 17, 2012 11:25
Economists MUST NOT use Economic measurements they can't be support with population samplings!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.