March 28, 2017    5 minute read

What to Expect from the US Economy

A Rollercoaster Ride    March 28, 2017    5 minute read

What to Expect from the US Economy

Many think the US economy will grow at the same rate it has, on average, from 1870 to 2007: around 2% per year. Following a recent paper published by J. Fernald of the San Francisco Fed, the US economy is likely to grow by 1.5% to 1.75% per year in the long run.

This means US average wages and demand will grow at a lower pace than they did in the past, which will have a negative impact on US companies. It also means interest rates will be lower than they have been and therefore “natural interest rates” will also be lower than they were before the subprime crisis.

Therefore, the progressive increase in Fed rates the US economy has been experiencing recently does not mean things are going back to the pre-crisis “normal.”

The Factors

Two main factors can be put forward to explain this expected decrease in the long-term US growth: productivity and demography. The great progress in educational levels the US experienced in the 20th century is not likely to be reached again. Therefore, its positive impact on productivity will be lower.

Indeed the impact of new technology on workers’ productivity has been way less important in the last century than at the time of the industrial revolution. And a lowering birth rate coupled with an ageing population will negatively impact economic growth. A case in point is Japan, which is struggling with an ageing population and a permanent quasi-non-existent economic growth over the past 20 years.

Also, an ageing country is thought to be less innovative, as elderly people are more reluctant to change (“Old men lived in old houses pondering old ideas” – A. Sauvy).

The Revolutions

This is also a common theory brought to the stage by R. Gordon (2012). There was indeed almost no growth before 1750, and one has no reasons to believe growth will continue forever (Solow, 1956).

Gordon distinguishes three industrial revolutions: steam and railroads (1750-1830), electricity, he internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum from 1870 to 1900; and computers, the web, mobile phones from 1960 to present.

The second industrial revolution was the most effective in creating economic growth, and once its spin-offs began to disappear, productivity growth during 1972-1996 was much slower than before. The third industrial revolution only provided a low, short-termed rebirth of productivity between 1966 and 2004.

Innovation and Employment

Yet, these theories might be overrated (“The Race Between Machine and Man: Implications of Technology for Growth, Factor Shares and Employment” D. Acemoglu, P. Restrepo).

Many great economists and historians (Ricardo, Keynes, Leontief) thought innovation would induce a massive technology-linked unemployment. They stand corrected, at least for the time being.

If one follows the idea over overflowing jobs from one sector to another (A. Sauvy) innovation will not kill jobs and employment, it will create new sectors requiring new skills, creating temporary unemployment depending on the ability of the economy to adapt its education and training systems.

Some think robots should be taxed because they destroy “human” jobs and are not even taxed as the labour factor is. Therefore robots would be enjoying an unfair advantage at the expense of workers. But robots are a new form of innovation and capital investment. The idea that robots kill jobs is not new.

The same issue was raised during the 19th century in Western Europe when weaving machines started being installed in what became factories.

Man vs. Machine

Ned Ludd started a protest movement in Lancashire, the UK:

 “Luddites feared that the time spent learning the skills of their craft would go to waste as machines would replace their role in the industry.”

In the 21st century, there still are some workers in factories and machines or robots have not taken over all jobs. Even if machine and robots were to take over all jobs, what would it mean? It would mean men are free of labour – a goal humanity has been seeking for centuries.

It would also mean that modern societies would need to find a new way to define the role of men, as at the moment men are finding a meaning in their lives through work. In the ancient Roman Republic, the word for work in Latin, “tripalium”, was a synonym for torture.

However, the big issue now is how the election of President Trump will impact the US growth. President Trump promised several times he would push $1trn worth of infrastructure investments forwards, in order to modernise roads, airports and railroads all around the US.

It should remind one of the modernisation plan put forward in the 1930s but President F. D. Roosevelt, which is often wrongly described as a Keynesian investment policy, The New Deal.

Do You Speak Keynes?

President Roosevelt had an interview with JM Keynes, at the end of which he told the press he had not understood a word of Keynes’ ideas. Such a plan should positively impact the economy as it will improve old, almost creeping infrastructures around the US.

Yet, it is hard to quantify the macroeconomic effect as it will mainly depend on the value Keynesian multiplier, which based on recent NBER and IMF working papers should be greater than 1, implying a positive effect of such loose fiscal policies.

Yet, President Trump has put forward his willingness to cut taxes for the wealthiest. One strongly disagrees with such an idea. Indeed, the top 10% of the wealthiest US households concentrated 34% of the US wealth in the 1970s against 50% in 2007.

This idea is confirmed by the studies of T. Piketty of wealth inequalities. Tax cuts are not welcomed as they will not be effective in supporting (a greater) potential growth. One just needs to remember the marginal tendency to save as revenues increase, meaning tax cuts for the wealthiest will not support demand but only savings.

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