Pushing Productivity

As I’ve talked to people about An Extraordinary Time, I’ve received a lot of questions about what government can do to improve productivity. Some readers have gone so far as to accuse me of advocating “no-growth economics” — and, not surprisingly, these critics tend to have their own favorite policy prescriptions which, they promise, will reinvigorate productivity growth and raise living standards.

So let me lay out my argument once more. I don’t assert that government is powerless to improve productivity. I do assert that productivity growth comes largely from innovative ideas put to use in the private sector. Government plays an important role in this. It’s very clear that government spending on education is important in developing a more highly skilled workforce. Government support for scientific research can have a payoff in terms of innovation, as Mariana Mazzucato has shown. Government spending on transportation infrastructure, when managed wisely, makes it easier and cheaper for producers and retailers to move goods and expand labor markets, giving workers a greater choice of jobs and allowing employers to draw on a larger pool of potential employees.

The challenge for policymakers, though, is that the timing and magnitude of these effects are highly unpredictable. It’s a good bet that if more students complete university degrees today, we’ll see some payoff in terms of higher productivity in the future. But when? And how much? We can’t answer those questions. With respect to research and development, it’s very clear that scientific discoveries themselves have no direct economic benefits. What matters is turning these discoveries into new products, services, and ways of doing business, and there is no way to predict whether that will happen or how important those innovations will prove to be. In this respect, the U.S. productivity boomlet of the late 1990s and early 2000s is instructive: the unexpected rise in the rate of productivity growth was attributable, in part, to research in computing and communications that had received public funding decades earlier. As president at the time, Bill Clinton was able to claim the credit for stronger economic growth, but he didn’t really have much to do with the public-sector investments that made it possible or with the private-sector innovations that drew on those publicly funded discoveries to bring our economy into the Internet era.

Through history, there have been a handful of developments that have led to extremely large increases in productivity: think of the steam engine, the electric light, the construction of the Interstate Highways. Bob Gordon, in his wonderful book The Rise and Fall of American Growth, highlights the importance of the the public water systems built in the early twentieth century in rapidly improving public health. For the most part, though, productivity improvement arrives slowly due to marginal improvements in technologies and business processes. When it comes to economic growth, lightning does not strike often.

So when a politician promises to make the economy grow faster, beware. Yes, everyone agrees that it’s easy to juice the economy in the short term: a big tax cut, some added deficit spending, or a cut in interest rates all are likely to do the trick, at the risk of unfortunate consequences a year or two hence. But over the long run, higher living standards depend overwhelmingly on the growth of workers’ productivity. Regardless of what governments do, in most times and in most places productivity grows slowly, which means that living standards improve only gradually. Like it or not, this is, as I assert in my book, the trajectory of an ordinary economy.

Time for a Timely Demise

As a young journalist, I was taught never to refer to someone’s “untimely” death: those words carry the implication that someone else’s death might well be timely. But perhaps there are some deaths that truly are timely. One might be that of Sears Holdings, the company that owns Sears and Kmart.

A few days ago the company announced that there is “substantial doubt” that it can survive. That news surprised the many Americans who were unaware that Sears was still in existence. Anyone who has been in a Sears store in the last 10 or 15 years wasn’t surprised at all. Everything about the store, from the dim lighting to the hodgepodge of merchandise on display,   screamed “going out of business.” It was hard to tell who they thought they were selling to.

Sears has been struggling for decades. Its encyclopedic catalog, offering everything from undershirts to mechanic’s tools, was last published in 1993, and many commentators have observed that competitors such as Home Depot, Target, Costco, and Bed, Bath and Beyond have been nibbling away at pieces of its business since the 1980s. Amazon’s transformation from a mere bookseller to an on-line emporium left Sears in the dust. Eddie Lampert, the hedge fund genius who took over Kmart in 2003 and used it to take control of Sears two years later, has had more success disassembling the two retailers–often in ways that benefit his hedge fund–than making them attractive places to shop. When a retailer tells its shareholders that  “Affiliates of our Chairman and Chief Executive Officer, whose interests may be different than your interests, exert substantial influence over our Company,” it’s a good bet that the story won’t end well.

Why might Sears’ demise be timely? Like The Great Atlantic and Pacific, which I wrote a book about several years ago, Sears used to have some of the most powerful brands in the world. A&P’s brands–Ann Page, Jane Parker, Eight O’Clock Coffee, and the A&P brand itself–went from world-beating to down-at-the-heels over the decades as the stores declined; by the early years of this century, A&P ran many of its stores under other names and went to great lengths to hide their connection with A&P. Sears is now in a similar situation. While its Kenmore appliances were once a safe choice for middle-class homeowners, the brand has been tarnished by its association with a failing chain. Much the same is true of Die Hard car batteries. The Sears name itself is likely a negative when it comes to attracting shoppers, save for a handful who still remember the chain’s glory days. The longer Sears hangs on before giving up the ghost, the less its storied brands are likely to be worth.

 

My Housing Subsidy

It seems the new U.S. administration wants to make a major reduction in housing subsidies. From what I’ve read in the paper, though, it’s not planning to touch ours.

I’ve got to say that our subsidy is pretty generous. Last year my wife and I sold one apartment and bought another, and with it came a much bigger mortgage. Our monthly payments to the mortgage company went up — but our after-tax costs went down. The reason, of course, is that the U.S. tax code offers a generous deduction for mortgage interest, and lets us deduct our local property taxes from our income as well. By splurging on a more expensive property, we were able to cut our taxes quite a bit.

Looking at it another way, our government encouraged us to behave imprudently. Rather than having a relatively small debt that we could reasonably expect to pay off in a few years, we now have a relatively large debt that may well outlive us. Why the government should want us to go more deeply into debt is a puzzlement. I would not be shocked to discover that it has something to do with the lobbyists who ply their trade daily on Capitol Hill.

In my recent book An Extraordinary Time, I discuss the slowdown in productivity growth that has held back economic growth around the world for many years. I can’t help but wonder whether tax preferences for debts like my mortgage aren’t part of the story. While not all countries provide tax breaks for home mortgages, many countries do provide very favorable tax treatment to debt. In his excellent book Between Debt and the Devil, Adair Turner makes a persuasive case that such tax breaks encourage investment in existing real estate assets, which does nothing for productivity growth, rather than investment in the sorts of equipment and machinery that could make our economies more productive.

And then there is the matter of fairness. After finishing up our federal income tax return, I can report that the federal housing subsidy for my wife and myself is as large as the subsidies for some of the residents of the public housing complex near our home. Their subsidies are apparently on the chopping block because they are deemed government give-aways. Our subsidy, on the other hand, seems quite secure.

 

 

About Economic Arrogance

The other day Paul Krugman took a whack at the Trump administration’s “economic arrogance.” He was referring to the administration’s repeated claims that its policies can supercharge U.S.  economic growth, taking it as high as 3.5% per year for a decade or more.

The idea that the government can make the economy grow much faster than it does today seems to be an article of faith for many Republicans. During last year’s campaign, more than 300 economists signed an open letter insisting that the economy “could and should be growing 3 to 4 percent.” More recently, Kansas governor Sam Brownback told the Conservative Political Action Conference on February 25, “We’ve got to get the national economy growing above this paltry 1.8%, and I think it’s going to be a key measure for Trump.”

Krugman is right to criticize Trump, and many other Republicans, for insisting that their standard economic nostrums, tax cuts and deregulation, are sure to make the economy grow faster over the long run. There’s plenty of evidence about this; as I point out in my book An Extraordinary Time, the “supply-side” policies of the Reagan Administration, which emphasized lower marginal tax rates and less regulation, failed to rejuvenate U.S. productivity growth and produce an economic miracle. On the contrary, productivity growth during the Reagan years was lower than at any time between World War II and 1977.

So I agree with Krugman that when they promise they can make the economy grow faster over the long term, the Republicans are blowing smoke. But it is only fair to point out, as Krugman does not, that many Democrats have done much the same thing. Since at least the 1970s, many Democrats have insisted that the Federal Reserve could make the economy grow faster if only it would, despite ample evidence that Fed policy has little to do with productivity growth. Economists backing Bernie Sanders’s quest for the Democratic presidential nomination last year insisted that his tax and spending plans could make the economy grow 5.3% a year — an even faster growth rate than Trump claims he can achieve. While Hillary Clinton’s campaign offered no specific claims about the extent to which her economic program would bring faster economic growth, the campaign was happy to point to an analysis by Moody’s contending that the Clinton program would add about three-tenths of a percent to annual economic growth over the next decade.

Suffice it to say that I’m skeptical of such claims from any source. Looking more than a couple of years into the future, the main source of economic growth is higher productivity. And as I point out in An Extraordinary Time, productivity grows unpredictably and erratically, due more to private-sector innovations than to government policy. Economists of all stripes often like to pretend otherwise. Arrogance knows no party.

Uncomfortable Questions About Our Ports

Sometimes people ask questions to which they really don’t want the answers–especially when the answers might be inconvenient. A new government report that purports to look at how U.S. container ports are performing is a good example.

Container shipping, as I document in my book The Box, was an American invention. Newark and Houston were the first ports anywhere in the world to have terminals designed specifically to handle containers, and container terminals were developed in ports such as Oakland and Baltimore years before containerships reached Europe and Asia. But U.S. ports have long been laggards when it comes to efficiency. The world’s most productive ports, by most measures, are all in Asia.  No U.S. container port comes close.

In 2015, Congress directed the Department of Transportation to prepare an annual report on port capacity and throughput and to “collect port performance measures.” Unfortunately, the department’s first annual report on port performance, released in mid-January, carefully avoids saying anything about container ports’ performance. It charts the number of acres covered by each port’s container terminals, the number of cranes, the number of linear feet of berth, and the number of containers passing through. But nothing in the report allows a reader to judge whether, say, the Port of New York and New Jersey is as efficient as the Port of Savannah. The average number of container moves per hour for each vessel call; the number of containers handled per acre of terminal area; the average time an incoming container spends in the storage yard before being removed for delivery; the number of dock workers per million containers; the number of containers actually handled as a percentage of theoretical capacity: all of these statistics would shed light on ports’ performance. None of them appears in the report.

Why might that be? Let me hazard a guess. True performance measures might reveal that many U.S. container ports have built far more capacity than they need, that poor management and union rules cause some ports to take far longer to handle a large ship than other ports, and that some ports use workers and storage space much less efficiently than others. They might also show that most U.S. container terminals make far less use of automation than the best-run terminals in other countries. It doesn’t take much imagination to figure out who might not want such measures of port performance to be highlighted. If they were, the public might start asking uncomfortable questions

Economic Illusions

In my book An Extraordinary Time, I document the hubris of economists who thought they had discovered the key to economic stability during the postwar Golden Age. Esteemed experts such as Walter Heller, chairman of the President’s Council of Economic Advisers under presidents Kennedy and Johnson, and Karl Schiller, West German economy minister and then finance minister as well, believed economists knew enough to tell presidents and prime ministers how to assure strong economic growth and low unemployment. It was a seductive vision. It also proved to be an illusion: when economic crisis arrived at the end of 1973, the experts were unable to deliver the prosperity they had promised, leaving citizens frustrated and angry.

A reader recently asked whether talk of a “Great Moderation” in the late 1990s and early 2000s was a similar display of hubris. As was the case during the boom of the 1960s, those involved in economic policy in the late 1990s seemed to think they had conquered the business cycle. They had many admirers. Journalist Bob Woodward feted Alan Greenspan, then the chairman of the Federal Reserve Board, as “The Maestro” for orchestrating the economy’s smooth performance. Of course, the Great Moderation ended in the deepest economic crisis since World War II — a crisis that is long since over in the United States, but has yet to come to an end in parts of Europe.

While macroeconomists displayed no lack of hubris in boasting of the Great Moderation, I would submit that there was an important difference between the economic policies of the 1960s and early ’70s and those of the Greenspan era. Walter Heller and his contemporaries didn’t pay much attention to monetary policy. Their version of fine tuning involved manipulating instruments under direct government control, mainly taxes and government spending, to achieve a desired economic outcome. The Fed was an afterthought. This approach to fiscal policy was badly discredited by the economic failures of the 1970s and has never come back into fashion.

During Greenspan’s time at the Fed, in contrast, fiscal policy was in disarray. Deep divisions between Democrats and Republicans and between Congress and President Clinton rendered the U.S. government incapable of changing tax rates and federal spending to achieve any particular economic goal; although the federal budget went into surplus at the end of Clinton’s presidency, this was more the result of unexpectedly high tax receipts during the Internet boom than any deliberate purpose. Greenspan himself was no fan of fine tuning. Rather, he was among the very large number of economists who believed the central bank should use its control over short-term interest rates to achieve price stability, and that other important factors affecting employment, the rate of economic growth, and the prices of financial assets were beyond Fed control.

Yet this point of view involved hubris as well. Macroeconomists in the 1990s overwhelmingly believed that the prices that mattered to the economy’s performance were those paid by consumers. The Fed, they said, didn’t need to worry about certain other prices, such as those of stocks and real estate, because these would not have much effect on employment, incomes, and voters’ other economic concerns. As we learned at considerable cost, that conventional wisdom wasn’t right. The sharp drop in asset prices that began in 2008 left millions of households with depleted retirement accounts and upside-down mortgages, forcing them to pull back spending, leading in turn to a sharp rise in unemployment. By and large, economists missed this connection between the financial economy and the real economy.

Of course, saying that the Fed should worry about asset prices as well as consumer prices still leaves the central bankers to determine when stock prices are reasonable and when they are soaring unjustifiably. Either way, economists must pretend to know something that cannot possibly be known until after the fact. In his masterful biography of Greenspan, Sebastian Mallaby wrote that “The delusion that statesmen can perform the impossible—that they really can qualify for the title of ‘maestro’—breeds complacency among citizens and hubris among leaders.” Unfortunately, he’s right. One of the great challenges facing modern democracies is that their citizens expect more than their governments can possibly deliver.

 

The Truth About “Pro-Growth” Economics

Like every president, Donald Trump has promised to make the economy grow faster. Good luck with that. In an article in Vox, I trace the history of the idea that we know how to make the economy grow faster. As I explain, while politicians love to talk about “pro-growth” policies, a productivity boom is not something Trump’s economic advisers, or anyone else’s, have the tools to bring about. Productivity depends mainly on private-sector decisions, and while government actions clearly influence it, the timing and extent of that influence are impossible to predict.

As I argue more fully in my new book, An Extraordinary Time, until and unless an unexpected productivity boom takes hold we’re likely to be stuck with an ordinary economy. That’s not terrible; at the moment, the United States is pretty close to full employment, and wages are on the rise. But it’s a far cry from the growth of 4 percent, 5 percent, or even 6 percent that Trump and some of his more zealous supporters have promised us. An effort to push the economy faster than underlying productivity improvements will allow is not likely to end well.

Running Hot

This morning I had a great opportunity to discuss my new book, An Extraordinary Time, live on the C-Span program Washington Journal. The host, John McArdle, was thoroughly prepared, and I found it a great relief to be able to talk about the history of the 1970s and 1980s without ending up in a conversation about Donald Trump. You can see the program here.

Viewers phoned in with a number of good questions. A key point I tried to make in responding is that the basic economic trends I write about, the slowdown in productivity growth after 1973 and the related slowdown in income growth, occurred across all the wealthy economies in Western Europe, North America, and Japan. Every day, it seems, we hear comments from politicians that they know exactly how to make our economy grow as fast as it did in the good old days. Some of the callers to Washington Journal echoed those views, blaming slow growth on something they don’t like–President Obama’s environmental policies, high CEO pay, budget deficits, tax treatment of carried interest, and so forth. I think it’s useful to point out to such people that since the end of the Golden Age in 1973 we’ve seen slower growth and higher unemployment in countries where none of those policies are in place. You may not like the low tax rate on carried interest, but it’s a considerable stretch to claim that it is causing our economy to grow at 2% a year rather than 5%.

Sometimes we get a bit carried away with our own power and insist we can make the economy roar like we think it ought to. The current lingo for this is to “run the economy hot.” What advocates of that approach seem to mean is that we should accept a higher inflation rate as a tradeoff for lower unemployment and big wage increases. As I explain in my book, this is not a new idea. We spent most of the 1970s believing that we could keep unemployment low if we were willing to accept just a little more inflation. That ended badly, and I’m not eager to repeat the experiment.

True Believers

One of the challenges of writing about economics is that many people treat it as a religion. They know what they think, and they don’t want to be bothered by facts that may not support their beliefs.

The response to my new book, An Extraordinary Time, has reminded me of the intensity of that religious fervor. The book asserts that an economy growing at one-and-a-half or two percent a year is not doing badly. While we all enjoy boom conditions like those that prevailed from the late 1940s until 1973, the extraordinary growth during those years was due to factors that are unlikely to be repeated; the slower growth we see today is not “secular stagnation,” as some would have it, but rather an ordinary economy behaving normally.

This assertion has brought outrage from all over the political spectrum. Gold bugs are convinced that if only the United States would go back on the gold standard, the economy would soar. Supply-siders blame government regulation for all ills; if only government would get out of the way, the economy would grow far faster. Ronald Reagan still has many acolytes who are convinced his policies made the U.S. economy perform far better than it actually did. Many of the mainstream macroeconomists who dispense policy advice so freely naturally disagree with the idea that their wisdom is unlikely to bring back the boom times. Self-styled socialists attack my claim that slow growth is normal because slow growth leaves many workers unable to improve their conditions; they take government’s ability to produce faster growth for granted.

I admit the idea that slow growth is ordinary growth is not enthralling. Who wouldn’t like full employment, big wage increases year after year, and a steadily improving standard of living?  But while it’s natural for politicians to promise such things, they have far less ability than they believe to improve productivity, which is the key to long-run economic growth. The fact that we might like the economy to soar doesn’t mean we have the tools to make that happen, at least for an extended period of time. Sometimes faith can overwhelm common sense.

 

Globalization in a Pickle

This morning, a crisp and lovely morning in Washington, I hopped on my bicycle and pedaled over to a farmers’ market a mile from my home. My modest goal was to buy a quart of half-dills from Number One Brothers, who turn cucumbers into terrific pickles.

The stand was open for business, stocked with pickled beets, pickled kale, and cauliflower and carrots pickled with ginger. There was not a half-dill in sight. The woman in charge told me that the last cucumber pickles of the season were sold in mid-October. Number One Brothers won’t have any more until June.

As I pondered this annoyance on the way home, I realized that it’s yet more evidence of what the shipping container has wrought. I, like most people, have come to expect the food I want when I want it. I don’t see why the end of cucumber season in the mid-Atlantic states should give rise to a pickle shortage. Aren’t farmers somewhere in the world now harvesting fresh cucumbers that can be piled in a container, shipped my way, and dumped into brine?

The answer, of course, is yes. Pickles from some far-off place may not be quite as good as the Number One Brothers half-dills, but I don’t need to wait until June to get my pickle fix. Some pickle factory somewhere is making cucumber pickles right this minute, and the container brings those pickles to me at an extremely modest cost. While buying them at Costco may not be as virtuous as buying directly from the maker at a neighborhood market, Costco never runs out of pickles.