Five Ways to Reboot the U.S. Economy

June 9, 2014 Topic: Economics Region: United States

Five Ways to Reboot the U.S. Economy

"The pro-growth policies are simple enough to see, the difficulty is acting on them." 

The U.S. economy is stuck in the Grand Malaise. GDP growth and employment are good but not great, and every positive seems to come with a caveat. Unemployment is low, but there has been a large decline in labor-force participation. GDP is projected to grow quickly in 2014, but turned in a negative performance for the first quarter. The question, then, is how does the United States remove these caveats from the economic picture?

1. Build Better Bridges:

The American Society of Civil Engineers estimates that, without any change in policy, the sorry state of U.S. infrastructure will cost the U.S. economy 3.5 million jobs and $3.1 trillion in GDP between 2012 and 2020—obscene figures. Plans to spend $1.6 trillion on infrastructure through 2020 will fall more than a trillion short of what is needed, and $2 trillion short of the standard to move the current D+ grade to a B-.

Although bridges and roads are, by dollar value, the most costly, infrastructure investment is needed across everything from water systems to airports. Roads would likely have the largest economic impact in the near term, but water will have increasing importance. Congestion alone costs $101 billion per year in time lost to traffic and fuel. There are also infrastructure requirements to support the U.S. production of shale oil and gas, which is, and will continue to be, a boost to U.S. GDP.

Infrastructure is typically a government responsibility, but there are other ways to finance the necessary improvements. Promoting more extensive use of Public-Private Partnerships (3P) for funding is a starting point, and there are some signs this is beginning to happen. One example is the passage of the Transportation Infrastructure Finance and Innovation Act which provides Federal credit assistance to 3Ps. Another sign is the formation of the Panel on Public-Private Partnership by the U.S. House of Representatives. Most states have laws outlining 3Ps, but there is a lack of similarity and overlap. The disparity in laws and regulations can cause confusion among potential private sector participants. To fund the needed roads and water works, the United States needs to clarify and encourage private involvement.

2. Tackle the Trade Treaties:

The United States needs to place more emphasis on passing the trade treaties it is already negotiating. The Trans-Atlantic Trade and Investment Partnership (TTIP), currently being negotiated with the European Union, and the Trans-Pacific Partnership (TPP), in Asia and South America, are the largest trade agreements in history. Separately, the TTIP and the TPP will reshape global trade. Together, they could bring massive economic gains to the United States as nontariff barriers—regulations and other nonexplicit trade frictions—are broken down.

The scale of these treaties is enormous. The TTIP represents around 50 percent of world GDP and the TPP around 40 percent. To the point of their scale, the Bertelsmann Foundation estimates the TTIP could create more than one million jobs and increase real incomes by 13 percent in the next decade.

The benefits of the TPP are less immediate. Because the United States makes up about 60 percent of the TPP GDP and already has agreements in place with most of the larger participants, there is little to gain in the near term (this is the “Too Big To Benefit” rule). In the longer run, the United States is positioning to be at the table for larger regional agreements that could include China. China joining trade negotiations changes the calculus of returns to the United States. The United States has never had a trade agreement with Japan, and breaking through some of the more closely held industry barriers could prove fruitful for both sides.

Asia is growing much more quickly than the West, and the United States needs to maintain relevance in the region. The TTIP keeps an eye to the West, but the TPP propels the United States’ necessary pivot East.

3. Entrepreneurial Employment:

The United States should do much more to encourage entrepreneurs and start-ups. Start-ups are the primary source of new jobs, and their health is critical to getting the economy back on track.

A recent Brookings Institute paper suggested that the U.S. economy, defined in terms of entrepreneurship, has been in a steady state of decline. But defining entrepreneurship by a lower firm entry rate (the number of firms less than a year old as a percent of all firms), as the authors do, is misleading for the simple reason that the inventory of existing businesses grows. If there are ten businesses that exist in the economy and ten more are birthed, the firm entry rate would be 100 percent. If there had been 20 existing businesses in the economy, the entry rate would be 50 percent. However, the latter economy would be just as entrepreneurial as the other. This means for the entry rate to hold steady, the number of business births must steadily increase, and it becomes increasingly difficult to maintain the rate.

In fact, business (establishment) births are at or above historical levels and the entrepreneurship rate (number of business births per 1000 labor market participants) has recovered to longer-term norms. The real problem is that start-ups are producing fewer jobs than they did a decade ago.

This “birth weight” is what should be targeted. Birth weights declined from six new jobs in the 1990s to about four today. There is the opportunity to develop some sort of toddler program that aims to increase the number of jobs earlier in the life cycle with tax incentives, increased access to capital, and other noncash enticements.

The alternative approach is to attempt to increase the number of start-ups. But this is likely a fool’s errand. The entrepreneurship rate is 1.4, in line with where it has been historically, and the United States is birthing about the same number of business as it did before the crisis. Simply returning the birth weights to ‘90s levels would create an additional 2 million jobs per year—roughly 100 percent of the jobs created by the U.S. economy in 2013.

If every start-up had six jobs, no one would be talking about a decline in U.S. dynamism. The United States does not need more start-ups—it needs more people working at them.

4. Computer Classes:

The United States does not appear to have the skill set of the twenty-first century figured out. Recognizing that the United States is no longer a manufacturing nation, and adapting accordingly would be a good start. If the United States returned to its peak of manufacturing employment—50 percent higher, it would increase total employment in the United States by only 4 percent. Low-end manufacturing is unlikely to ever return; its time to devise a new national strategy that concentrates on a new class of jobs—incontestable jobs—that cannot easily be intermediated by technology.

Contestable jobs are those that people compete for. As a result of the IT revolution and subsequent innovations, an increasing number of jobs that were once considered impossible to outsource (or too expensive) can now be moved quickly and cheaply. It is estimated that 25 percent of all U.S. jobs are now contestable.

Building a successful, educated labor force for the twenty-first century will not be enough. The United States needs to invest in education and training in sectors that are not contestable or difficult to contest, and be certain to understand where the United States has a long-term advantage. There is the temptation to generate jobs in government, since these are largely uncontestable. But the United States should avoid this temptation and concentrate on generating high-end services employment with skills that are not easily replicable. This ensures that jobs created today will last—at least until the next wave of technological innovation. As an added benefit, these should also pay more than contestable jobs.

5. Bribe the Boomers:

No rebuilding of America can be done without the generation that built it. Many of the cataclysmic shifts in the U.S. economy are caused by the Boomers, and if the United States is to make a comeback, they will need to be involved.

Boomers are working later in life—and this should be encouraged—the longer the Boomers remain in the labor force the gentler their impact will be on social security and other entitlement programs.

Boomers are also wealthy, and this wealth should be encouraged to flow towards productive outcomes. The housing bubble destroyed the primary mechanism younger people use to finance start-ups: housing equity. If Boomers can be incentivized to finance start-ups and continue to be the entrepreneurial generation longer than people expect, the United States could have an interesting future ahead of it. The United States is still looking forward to its largest cohort of entrepreneurs ever, and with the correct set of incentives, the United States could witness a golden age of business births.

The Boomers must remain engaged in the economy and nurture the entrepreneurial spirit. Formal mentoring programs and other engagement tools will be critical to rebuilding the U.S. economy.

It is unlikely the United States will ever return to the period of growth in excess of 3 percent for long periods of time. But better infrastructure will help avoid unnecessary costs and keep transport costs low, which will have a positive effect on the calculus of trade when the TTIP and TPP are finally negotiated. More jobs will be created as entrepreneurs with useful skill sets create new products and services. The new products could increase trade and create demand for more and better infrastructure. It could be a virtuous cycle of economic expansion and job creation. The pro-growth policies are simple enough to see—the difficulty is acting on them.