What’s not to like about the recent employment numbers–211,000 jobs added in April, unemployment at 4.4%, the lowest figure in ten years, and no significant decrease in workforce participation, which means that the job market may be tightening, possibly a precursor of wage increases, and business and consumer confidence are on the rise.
But significant and troubling underlying issues remain: The worst GDP growth numbers in three years and the ongoing lackluster productivity growth are continuing evidence that serious structural problems must be addressed if we are to climb out of the “2% Obama growth doldrums”, as the Wall Street Journal characterizes it.
In an insightful article, Marie-Josee Kravis of the Hudson Institute discusses these issues and the structural changes that will be necessary to reverse the trend. First of all, she makes clear that the productivity decline began long before the financial crisis of the Great Recession, but it has grown markedly worse. From 1950 to 1970, U. S. productivity grew by an average of 2.6% annually. From 1970 to 1990 it fell to 1.5%, but except for the information technology boom years, it has been in free fall and is now about 0.6% per year. Of course, she notes, there are many areas of disagreement among experts about the data, but no one seems to doubt the significance of the problem and the real debate should be about policies that favor productivity and GDP growth.
A priority structural consideration here is that, as she points out, there is plenty of evidence that economic dynamism and entrepreneurship are no longer driving the U. S. economy. Start ups are being created at a much slower pace, which dampens the dynamics of innovation that contribute so significantly to productivity. The churn of the U. S. labor market is weak across all regions, industries, and age groups, indicating that people are not as mobile in seeking new opportunities. These are symptoms of a decades-long weakness in capital spending that has resulted in a decline in nonresidential fixed investment growth from 12% annually in the 1970s to 3.3% today.
The takeaway for me from her article is a reminder that capital goes and stays where it is well-treated and that jobs, along with GDP growth and productivity, follow investment. There is plenty of funding available here and offshore to reverse the weakness in capital spending if government will provide the incentives to put it to work. The immediately necessary structural changes implied here are pretty obvious–a major supply-side tax cut; an intense focus on deregulation, including licensing requirements; and the satisfactory replacement of Obamacare with a state-driven, market-based health care finance system as the first major step in overall entitlement reform.