Boom or Bust? Expect America's Economy To Change In The 2020s

January 20, 2020 Topic: Economics Blog Brand: The Buzz Tags: U.S. EconomyTechnologyInnovationTax ReformGDP Growth

Boom or Bust? Expect America's Economy To Change In The 2020s

Looking to the future, how might population growth, trade, Big Tech, and new innovations all affect America’s capacity for economic growth? 

Well, the US economy has been growing at three percent, maybe more, since WWII. More recently, it’s grown more at about two percent, and I think that’s roughly the sort of long term forecast by the Fed or the CBO.

But let’s say they were wrong, and the US economy over the next twenty-five years grows at one percent. What does that look like? The US economy has never had the economy grow that slowly for that long. What does America look like after 25 years of one percent growth versus 25 years of two percent growth, or does it make much of a difference?

I think we experienced for most of the last forty years one percent growth, measured in productivity terms, per worker hour. Maybe you’re saying we’ve sustained faster growth in part because people were working more. So I guess in that sense we have been experiencing it.

I should have emphasized something else when you were talking about narrowly focusing on GDP growth: Another key thing which would become more prominent if the pie is expanding at a slower rate is being concerned about inequality. Inequality is a first-order thing. So when you describe the growth rate going from two to one percent, that’s enormous for progress and human welfare, but another thing we can do to product human progress is to reduce inequality. Now, doing both of those are difficult — both promoting growth and reducing inequality. But economists don’t obsess with GDP growth at the expense of saying, “Well inequality, don’t worry about that.” We’re very concerned about that.

So something like artificial intelligence, which might cause the growth rate to accelerate but at the expense of rising inequality — economists would be very concerned about making sure that the growth that this generated was redistributed, and distributed more equally to prevent inequality from soaring.

So I guess I’m back to your direct question. I do see the pie expanding more slowly, so we’ll naturally be more concerned with inequality. We should be concerned about it anyway — we should be concerned whether growth accelerates or stagnates — but I can see it becoming a more prominent issue if growth is slow.

Is it possible we get an economy that’s this big, given the demographics, to grow at three percent going forward? Whether it comes from AI or robotics increasing productivity, is a three percent economy still possible for the United States?

I think it is, but it’s going to have to come through some sort of technological revolution, like you’re mentioning. Because if I think about the growth rate of resources we can devote to research, even if we allowed twice the H1B visas, that’s not going to double the growth rate of research activity, in a way that could feed the growth rate and push it up to two or three percent in terms of productivity. So where I think the acceleration would have to come form is a rich vein of technological progress in things like AI and machine learning.

You know, it’s somewhat paradoxical, because a lot of people are fearing it, and I may sound like this completely out of touch academic professor when I say, “Hey, this is a great opportunity here! This is like the tractor hitting farming. Yes, it wiped out massive numbers of jobs in farming, but if we can harness it to benefit the population more broadly, this could be a great thing. This could enable us to enjoy more leisure while getting the same goods, reducing pollution, addressing all sorts of resource problems.”

I think people are just focusing on the downside now. I think so much of what we hear about technology, people just think, “That costs jobs. That’s job-replacing, it’s not job-enabling, it’s not job-creating.”

Yes, and I’m a cautious — or conditional — optimist in the sense that, as long as we handle the distributional issues, because there’s going to be lots of pain and disruption associated with this, but as long as we handle that intelligently through things like wage subsidies and rising sectors that make it easier for people to transition, then this is something we should welcome, rather than be fearful of. But I understand that people who have been hammered by the decline of manufacturing might be suspicious of people telling them to be optimistic about this.

Peter, thanks for coming on the podcast.

Thanks for having me! This was really fun.

This article by James Pethokoukis first appeared at the American Enterprise Institute.

Image: Reuters.