US growth: Tim Pawlenty and Larry Summers, otherwise unlikely bedfellows, seem to agree GDP growth is the key to fixing US deficit and job problems. Forget the latter’s 5 per cent GDP growth rate target. Just historically average growth — 3.3 per cent or so — would be plenty to shrink deficits and boost employment. But getting even there requires the right policies.
However fanciful Pawlenty’s aspirations for economic expansion, he is right to focus on elevating growth beyond its current shallow trajectory, which is keeping wage growth flat and unemployment high. In a new commentary, Summers, until last year a White House economic adviser, also bemoans sluggish growth and highlights the danger of an American “lost decade” to rival Japan’s.
The US economy had averaged 3.3 per cent annual growth since 1950, half coming from an expanding labour force and half from productivity improvements. That rate slowed to 2.8 per cent over the past two decades. Many economists see the pace fading further, as growth in the labour force decelerates to just 0.5 per cent annually from 2 per cent in the 1970s, thanks to an ageing population and a falling birth rate. With productivity constant, GDP growth might average just 2.2 per cent, the US government’s long-term forecast.
Squeezing out a bit more growth here and there would make a big difference. The McKinsey Global Institute predicts the US economy will need to generate 21 million jobs to reduce the unemployment rate to 5 per cent by 2020. It’s a realistic goal if the economy grows at least 3.3 per cent a year on average. But growth of 2.6 per cent would produce just 9 million jobs by then. To expand the labour supply, McKinsey recommends a variety of measures including removal of barriers to high-skill immigration and lessening taxes that nudge seniors and women from the workplace. To increase the output from those additional workers, McKinsey sees the sort of things Pawlenty advocates, including cutting business regulation, as necessary but not sufficient. Countries rarely escape debt traps only by cutting spending. America also needs to up its investment in infrastructure — something Summers also recommends — and basic scientific research. Even with the perfect policy environment, though, America can’t hope to grow even ha lf as fast as, say, China or India. Luckily for Washington, it doesn’t have to.
