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Thursday, February 19, 2015

Americans Face Daunting Long Term Economic Growth Challenges ... The Math is Simple ... Potential Output = Number of Workers + Productivity of Those Workers

In several recent posts, I've been trying to make the point that an aging workforce (retiring baby boomers) combined with a growing number of government workers (at all levels of government, including local, state, federal, K-12 and higher education) and quasi-government workers (such as health care), will make it extremely challenging for Americans to continue to improve our standard of living along the lines we've experienced the past several decades.

Throw in the effects of global competition, technological changes, an inadequate educational system and excessive current debt levels and the problem becomes even more pronounced.

A solid explanation of our long term challenges with economic growth is summarized in Economy's Supply Side Sputters:

"Demand finally looks healthy again. Business is hiring at the fastest pace since 2000, consumer confidence is at prerecession levels and government austerity has come to an end.

Yet as demand heals, there are growing signs that the economy has a problem with supply, or the ability of the economy to produce goods and services using all available labor, capital and know-how.

Supply determines how fast the economy grows over the long term, and it largely depends on two things: the number of workers, and how productive they are.

The evidence is mounting that those two key drivers of the economy’s supply side, the labor force and productivity, are seriously impaired. This isn’t holding the economy back at present, but before long it will. An economy with a sickly supply side will struggle to generate higher standards of living. . . .

Consider these two factors—the labor force, and productivity—in turn. The share of the population that is either working or looking for work, the labor-force participation rate, has fallen sharply. Between 2007 and 2014, the participation rate shrank to 62.9% from 66%. Initially, the drop in participation was blamed on the severity of the recession and feebleness of the recovery. Workers who had gone months unable to find a job gave up looking and were thus no longer counted as part of the labor force. When demand for workers picked up, so would participation, this theory went.

That explanation looks less convincing with each passing year. Participation has stabilized over the past year but hasn’t risen. . . . The Congressional Budget Office attributes more than half the drop to demographics. In 2008, the same year that Lehman Brothers failed, the first baby boomers qualified for Social Security. Since then, Social Security has added 2.7 million new retirees per year, compared with 1.8 million in the prior decade.

A stronger economy will draw some workers back into the labor force, but the CBO reckons that any increase in entrants will be overwhelmed by retirements, pushing the participation rate down to 62% by 2019. It estimates the labor force will grow just 0.5% a year in coming decades, compared with 1.5% from 1950 to 2014.

Also, there’s no guarantee employers will snap up any workers on the sidelines as the economy strengthens. In December, 3.6% of jobs went unfilled, the highest vacancy rate since 2001. That’s higher than in 2007, when there were far fewer unemployed, which suggests available workers aren’t well matched to available jobs . . . . To be sure, qualified workers can’t be that scarce or employers would be paying more to find them, so wage growth wouldn’t be so weak. On the other hand, at least part of that weakness is due to supply-side factors, and this is where productivity comes in.

Over time, what workers earn, adjusted for inflation, should track their productivity—how much they produce per hour. Productivity has grown just 1.3% a year since the end of the last expansion in 2007, the weakest performance since the 1970s. Productivity didn’t grow at all last year. . . . Productivity is notoriously hard to predict, but a big rebound looks unlikely.

Diminished supply poses big challenges to policy makers. . . . For Mr. Obama (and his successors), the choices are harder. His latest budget projects an economy that by 2018 is 3% smaller than last year’s budget envisioned. A smaller economy generates less revenue, and that’s one reason he promises little progress reducing the debt as a share of economic output. . . .

Neither the president nor, it appears, many Republicans any longer support a higher retirement age for Medicare and Social Security, which would encourage longer work lives. As the constraints of a diminished supply side bite, more of these ideas will have to be on the table."

Summing Up

The foregoing explanation of the issues facing future Americans points out the challenges ahead which will only be successfully addressed by gains in productivity levels throughout our  economy, including but not limited to government and quasi-government workers.

The issues confronting an aging and highly indebted society aren't hype and they aren't partisan in nature.

My bet and sincere hope is that over time We the People will rise to the challenge and deal with our many growth related economic and systemic educational problems before they become 'unfixable.'

To be forewarned is to be forearmed, so let's consider ourselves duly and appropriately forewarned.

That's my take.

Thanks. Bob.

1 comment:

  1. Pedro the Camel DriverFebruary 19, 2015 at 9:29 AM

    "We the people will (or would) rise to the challenge" but, our government won't! They're safely out of reach of us voters and our ballot boxes presently no? Si.

    ReplyDelete