Magazine | February 6, 2017, Issue

Prospects for Growth

(Image: Dreamstime; cover via Amazon)
An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy, by Marc Levinson (Basic, 336 pp., $27.99)

Donald Trump’s “Make America Great Again” slogan has huge licensing potential. It could, with some obvious tweaks, go global: “Make France Great Again,” “Make Japan Great Again,” and so on. MAGA is a punchy political catchphrase, to be sure. It certainly has more inspirational oomph than Hillary Clinton’s “Stronger Together.”

But more than that, MAGA’s nostalgia has persuasive power because it is based on a real economic phenomenon experienced by citizens of all advanced economies, one documented by former Economist journalist Marc Levinson in his new book. The immediate post-war decades — the years 1948 through 1973, to be precise — saw the world economy boom as never before. This “Golden Age,” Levinson writes, “blossomed” from “a world in ruin” to one of unimagined prosperity — hardly the continuation of global depression expected by many economists.

Some of that hypergrowth can be explained by devastated nations’ need to rebuild after World War II. But it was more than that: In the United States, with an industrial capacity untouched by the global conflagration, overall economic output doubled. Even more impressive were the gains in output per worker, or productivity, the most important long-term economic factor in raising living standards. Output per worker in the largest, richest economies grew at nearly 5 percent annually from 1959 through 1973, both raising worker incomes and financing the dramatic expansion of the welfare state. No wonder Richard Nixon declared the U.S. economy so strong “it would take a genius to wreck it.”

Then, all of a sudden, the Golden Age of fast productivity growth and quickly rising incomes stopped and never quite restarted, both here and in other advanced economies. Levinson runs through many of the theories as to why — including soaring oil prices, the shift to a service economy, and environmental regulations — but finds them inadequate to explain “the productivity bust afflicting countries with vastly different economies and divergent approaches to economic policy.” But perhaps the best explanation is really nothing more than that today’s “new normal” is really the natural state of things. As the years and decades pass, the powerful post-war expansion more and more seems like an unrepeatable phenomenon. And it is this story of the coming and passing of that long boom — and apparently the inability of politicians to do much about resuscitating it — that Levinson crisply tells:

In Japan, North America, and much of Europe and Latin America, the warmth of prosperity was replaced by cold insecurity. . . . It was an age of anxiety, not an era of boundless optimism. . . . Neither market-oriented policies, such as those championed by Margaret Thatcher and Ronald Reagan, nor statist reforms, such as those initially undertaken by François Mitterrand, have proven able to alter that reality. In Japan and Korea, massive state-guided investment booms . . . brought explosive economic growth followed by rapid improvement in living standards — again, for a while. But those economies, too, eventually fell from orbit, their political leaders no longer able to deliver miracles.

Indeed, one could plausibly trace the current upwelling of populist politics to that 1970s turning point. New research finds that only half of young adults today are making more than their parents were at a similar age. Back in the early 1970s, almost of all them — 92 percent — were. Now one can reasonably dispute the severity of the decline, but that there has been one seems correct. And a good chunk of that decline can be blamed on the decades-long downshift in economic growth. Whatever the exact numbers, no one doubts that slower growth, less equitably enjoyed, has produced a two-speed society, as documented in recent books such as Coming Apart, by Charles Murray, and The Fractured Republic, by Yuval Levin. The tide is not rising as fast as it used to, and more boats are anchored to the bottom.

Another book that inevitably comes to mind as one reads Levinson’s is The Rise and Fall of American Growth, by Robert Gordon, frequently cited as perhaps the best economics book of 2016. Where Levinson focuses on the second half of the 20th century and the transition from the Golden Age to the Long Slump, Gordon documents the “special century” of fast growth from 1870 to 1970 and why it might never return. Where Levinson highlights the futile attempts of policymakers to contend with the productivity slowdown, Gordon demonstrates how fast growth in the past was generated by significant, but unrepeatable, innovations, such as electrification, public sanitation, and the internal-combustion engine.

Of course, neither Gordon nor Levinson dismisses the possibility of another Golden Age. Productivity booms are unpredictable: There was a brief one from the mid 1990s through the early 2000s, after years in which economists wondered when computerization would show up in the numbers. But judging by current statistics, there is little reason to think one is nigh. Productivity growth has nearly flatlined since the Great Recession ended. And Levinson doubts that any politician, including Donald Trump, knows the secret formula for revivification. Citing research that found that episodes of high growth have little in common, Levinson writes, “Hope that wise, well-considered measures will propel an economy to a higher growth trajectory is eternal, but there are no foolproof recipes.”

At this point, Republicans and other conservative readers might wonder whether Levinson somehow missed the 1980s and 1990s, the era commonly identified as the Long Boom, in which the Reagan Revolution ended the Carter-era malaise and launched the greatest peacetime economic expansion in American history. But Morning in America never came, Levinson writes: “Reagan infused the United States with a new optimism about the future, a welcome change after years of despair. But what the Reagan Revolution could not do was restore the broad improvement in living standards that Americans expected. . . . Supply-side economics proved to be a bust.”

Harsh, but not wholly inaccurate, if you judge supply-siders by their own claims. Yes, the economy surged after the 1981–82 recession, although one might expect just such a high bounce given the severity of the downturn and the effect of easier monetary policy from the Fed. A recent Brookings Institution literature review noted a 1989 analysis by Martin Feldstein and Doug Elmendorf that found that the 1981 tax cuts “had virtually no net impact on economic growth.” It is important to recall that the core thesis of the supply-siders was not just that tax cuts would stimulate growth — many demand-side Keynesians thought much the same — but that lower marginal tax rates on productive activity would result in rising productivity.

It didn’t happen. Levinson quotes budgeteer bad boy David Stockman from 1986: “The fundamentals I look at are not a miracle. Our savings rate is the lowest in modern times. Last year our productivity growth was flat, and our whole theory was that we were going to cause an explosion of productivity and rising real incomes.” Productivity growth remained quiescent for another decade, surged during the Internet boom, and then faded again.

Or did it? To fully embrace the “end of fast growth” thesis from Gordon and Levinson means relying on government-generated GDP and productivity statistics. But there is currently an active debate among economists and Silicon Valley technologists about whether these common economic metrics are as accurate and useful in today’s increasingly digital economy as they were when the American economy was built around producing commodities such as wheat and steel. Not only might they miss hard-to-measure qualitative improvements in an economy of which information technology is a bigger and bigger piece; they also fail to capture the benefits of free digital content to consumers.

And even Gordon concedes that traditional economic measures can be problematic. For instance, as economist Diane Coyle has noted, we can easily measure the caloric content of the American diet or the price of food, but what about the value of the improved variety of food available? Other economists note, for instance, that the official stats ignore welfare gains from rising life expectancy, which could equal a full percentage point a year. The limits of our current ability to fully and completely measure the state of productivity growth has led Goldman Sachs economists to argue that “confident pronouncements that the standard of living is growing much more slowly than in the past should be taken with a grain of salt.”

Moreover, Levinson seems implicitly to accept Gordon’s hand-wave dismissal of recent innovations as narrow — confined to communications, information, and entertainment. Would you rather have indoor plumbing or a smartphone? Microsoft co-founder Bill Gates is one of many techies who find that economic perspective limited:

The digital revolution affects the very mechanism of the marketplace. How buyers and sellers find each other, how we amass information, how we can create models to simulate things before building them, how scientists collaborate across continents, how we learn new things — all of this has changed dramatically thanks to digital innovation. Yes, household appliances look pretty much the same now as they did in 1970, but that doesn’t mean our lives in 2070 won’t be profoundly different.

One might also mention the positive impact of globalization in raising living standards across Asia and modernizing its economies — which resulted in the growing pool of scientists with access to ever better tools for discovery. The challenge for policymakers is to ensure the best possible ecology for converting discovery into innovations that are broadly beneficial. This means, among other things, fixing regulations that hamper startups and making it cheaper to live in high-productivity cities such as New York and San Francisco. Of course, because of the mere fact of demographic limits on labor-force growth — the retirement of the Baby Boom generation and the decline in the growth of the working-age population — better policy will not bring back the higher-GDP days of the Golden Age. But there is reason to be hopeful that even if the gloomy stats are correct, we have it within our means to push farther and faster the technological frontier, and to help create another extraordinary time.

– Mr. Pethokoukis is the DeWitt Wallace Fellow at the American Enterprise Institute and a contributor to CNBC.

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