Tuesday, August 9, 2016

What Can A New President Do To Reverse Economic Malaise?

Hillary Clinton and Donald Trump are promising voters new programs that will increase economic growth and make them happier.  Robert Gordon describes some of the roadblocks that they will face and he offers some suggestions that would be helpful.

Economic growth is a function of the number of hours worked and the output per hour of work, or productivity.  It is hard to increase the number of hours worked in an economy that is close to full employment; it is also more difficult with a slow population growth rate.  It is even harder in an economy with a low productivity growth rate.  The slow rate of economic growth in the US economy is easily explained by these factors.  Moreover, much of the malaise that many are experiencing is due to an unequal distribution of the rewards from productivity.  The benefits from productivity, which used to be shared more equally in the US, now go primarily to the top 1%.

Governments can develop programs that supplement lost income, but that is more difficult do accomplish in a slow growth economy.  Tax revenues are dependent upon economic growth.  Budget deficits would grow unless tax revenues were increased to pay for government programs.  One solution to this problem is to make the tax system more progressive.  The US tax system has been made less progressive over the last few decades but a change in political sentiment might reverse that trend.  The government can also spend more money on infrastructure.  That has the potential to make the economy more productive; it  will also expand the economy and provide jobs.  Both Clinton and Trump have proposed infrastructure investments.  That might increase government borrowing but the increase in productivity may pay for the cost.  That is especially true when the government can borrow funds at very low rates.  Budget deficits are not as important as the cost of servicing that debt.  Government spending on debt service relative to GDP is the more important factor.  Growing GDP in a low interest rate environment is a solution that has promise.  The only real barrier to the solution is a Republican congress.  They believe that an oversized government is the real problem.  Government regulations, high tax rates and spending on social welfare programs must be reversed.  One of the problems with that argument is that there is slow growth in much of the developed world.  There is almost no relationship between the economic growth rate and the size of government.  Gordon has a much better explanation for slow economic growth.

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