The Case Against Growth And Stimulus

Larry Summers argued in this recent Financial Times article that progressives ought to favour growth policies, which prompted this response from John Cochrane. Although John Cochrane had some points of partisan disagreement, he strongly agreed with the premise that politicians in the United States need to talk more about growth. In my view, politicians talk too much about growth already. (H/T to Leo Kolivakis  @PensionPulse for ending me the Cochrane article link.)

Partisan Bickering

I will not pretend that I am neutral on political economic debates -- I doubt that I will be invited to speak at a libertarian convention any time soon. However, I try to avoid telling people how they should vote in their elections.

However, I need to note that being "pro-growth" has become a motherhood issue for Republicans, which led Larry Summers to plead to progressives to become "pro-growth." Both he and John Cochrane argue that a tight labour market is the best social programme (which is what Minsky was saying all along). However, John Cochrane lays it on thick at the end of his article:

If Larry can persuade Mrs. Clinton and the "progressives" in the Democratic Party to focus on growth, to state goals for growth, and to hold themselves accountable for growth, then we can have an honest and very productive conversation about what's stopping growth and what steps can further it.

Accountability? I have my doubts that the Republican party really wants that. As Gerard MacDonell notes at the end of this article, the United States lost private sector jobs during the term of the last Republican President. His harsh assessment:

But a more sensible inference here is that you can just save yourself some time when the right starts lecturing you about a “growth agenda.”  There is no evidence that the GOP has ever implemented an actual growth agenda, at least as measured by — you know — EVIDENCE of effects on the economy.

Partisan wrangling aside, should we care about growth, for the sake of growth, and is now the time for a big fiscal boost to pursue growth?

Resource Limits To Growth

One reason that progressives are "anti-growth" is the result of environmental concerns. Although I am in the "Peak Oil" camp, I dislike arguments that say that we cannot have "infinite growth on a finite planet." (Please see "Sustained Growth on a Finite Planet" for my views on the topic.) It is possible for measured GDP to grow, even though real resource usage is flat. As a miniature example, note how U.S. miles driven was flat for a few years after 2010, even though real GDP was chugging along.

Of course, the fact that the economy can grow without hitting resource limits is possible, does not mean that it will happen. There is no reason to believe that the U.S. economy is switching to a less oil-intensive growth path, and renewed strong growth would most likely cause energy consumption to pick up. One may note that miles driven has finally responded to steady GDP growth in the last few years. Export-dependent developing countries would perk up in response to U.S. growth, and an oil price spike would be waiting in the wings.

Unless the economy is restructured to be less vulnerable to energy price spikes, planning on sustained high growth rates may be a fantasy. (In a slow growth environment, the economy can more easily adapt to resource constraints.)

Infrastructure Stimulus Now?

One of the ideas that Larry Summers and others (such as the Barry Bernie Sanders campaign [oops- more of a fan of football than politics]) have been pushing is hefty infrastructure investment, as a means of increasing aggregate demand. (It may be a good idea for the United States federal government to increase investment anyway, and use taxes to neutralise excessive demand; that is not what I am interested in discussing here.) I will admit that I have not "run the numbers," on such a programme (mainly because I did not see such a programme being enacted). However, the timing is not in favour of such a move.

Although I believe that it will take years for the U.S. labour market to overheat, that is a function of the current slow growth environment. Job growth is only slightly faster than population growth. Furthermore, I believe that the headline (U-3) unemployment rate overstates the reduction in labour market slack.

However, the level of slack is much reduced, relative to the situation at the start of the decade. We can use the U-6 unemployment rate as a proxy for underemployment in the economy. (The U-6 unemployment rate includes more people who are underemployed.) The latest reading of the U-6 rate is 9.7%, which is about 3% above the minimum reached during the relatively tight labour markets during the tech bubble. Under the current economic structure, the labour market was overheating. (One could imagine labour market reforms -- such as a Job Guarantee -- allowing for a much lower level of underemployment. That is outside the scope of this article.)

This appears to allow for a burst of strong job growth. Unfortunately, U.S. labour market is obviously segmented. The "high skill" segments are doing relatively well (at least when compared to "low skill" segments). The chart below shows the unemployment rate for Americans with at least a College degree. At 2.5%, it is only a percent above where it was during the tech boom. (Admittedly, the tightness of this segment of the labour market is overstated by the reality that employers are demanding college degrees for jobs that obviously do not require them, such as being fry cooks.)

Non-targeted "demand management" (such as infrastructure spending) is probably going to require creating jobs for college-educated workers. (You need an engineering degree to sign off on plans, for example.) It is a safe bet that the job market for college graduates would become extremely tight before the U-6 unemployment rate even begins to close on its historical lows. This would cause inflationary pressures for businesses that rely on college-educated workers.

The inflationary consequences of non-targeted demand management was why Minsky was skeptical about using the policies in the 1960s and 1970s, and I doubt that conditions are much different at this point in the cycle. (One could argue that there was a window of opportunity in 2010, but that window was closed by the slow growth that has occurred since then.)

(Readers could reasonably ask -- what is so bad about inflation? Is unemployment not a greater social ill than a bit of inflation? Although that is an interesting question, I will stick with the consensus view that inflation will remain contained. An independent Fed will do its best to end the cycle if inflation heats up, cancelling out the fiscal thrust. Furthermore, inflation is politically unpopular.)

Targeted Employment Growth

The sensible objective of policy is targeted employment growth; this would allow the U-6 rate to be reduced, while not causing the stronger segments of the labour market to overheat. A Job Guarantee would be the most effective policy towards that end, but I imagine that there are partial steps that could be taken in that direction. In any event, we would need to model the microeconomic impact of the policies, and not rely on aggregate demand management.

It is likely that this would improve the bargaining position of labour, and achieve other social policies. Furthermore, it would probably increase growth rates. However, this effect on growth is best viewed as accidental. The focus should be on eliminating imbalances within the economy, and let the growth rate be sorted out on its own.

Politicians of all stripes find it necessary to argue that whatever policy they endorse will increase growth; to do otherwise is probably political suicide. We need to set these concerns aside and focus on the real effects of policies, and not worry about the nebulous effects on growth.

(c) Brian Romanchuk 2016