Can Investment Saving Save The Economy?

A real and disturbing trend has emerged: Economic growth is slowing down, and we don’t know why–or for how long. That is the topic of discussion in Harvard economist Greg Mankiw’s newest New York Times column.

Mankiw offers multiple reasons why growth is slowing down, but before we get to those–and their supposed solutions–let’s first diagnose the problem. As Mankiw writes, “the growth rate of real G.D.P. per person has averaged just 0.44 percent per year, compared with the historical norm of 2.0 percent. At a rate of 2.0 percent, incomes double every 35 years. At a rate of 0.44 percent, it takes about 160 years to double.” In other words, had growth during the recent “recovery” met historical averages–the growth didn’t even have to be spectacular, just normal–we would be much wealthier today than we are.

In fact, if the growth trend continues, we will be much, much poorer. The recent drop in median income is nothing like what we will face in the future.

So, what is causing this?

Mankiw offers a few theories. The theory I like to side with is the one where the government is the problem (see here). That may be my conservatism speaking, but it makes the most sense. Median income, for example, is falling because we are working less, exemplified by record low labor participation rates.

Many have argued this is simply a symptom of demographic changes; Americans are getting older, and older people are less likely to work. But this can’t explain falling teenage labor force participation rates.

Both of these trends began around 2000, when regulations began to increase at an even faster pace, and they accelerated during Obama’s presidency, when both tax increases and regulatory increases were underway. Not to mention skyrocketing spending, among other things.

One other theory–the secular stagnation theory–holds that there isn’t enough demand to provide sufficient amount of employment to our economy. The solution? Government investment spending.

But there’s a problem with this: A new report by the CBO has concluded the effect of government investment is, when all is said and done, essentially zero.

The short-term effects of a billion dollars in spending is only $50 million. The effect on productivity is long-term, with the effects only being fully hashed out 20 years later. But even these long-run effects aren’t very large. Putting all of the effects together, a $500 billion investment spending package would shrink the economy by $9 billion but grow it by $15 billion, leading to a $6 billion increase in GDP. But, as our economy is worth in excess of $18 trillion, these effects are minuscule.

So the real solutions aren’t more government intrusion; the solution is less. We need to undo the bad policies of today and implement better policies tomorrow. We need health care reform, tort reform, immigration reform, tax reform, entitlement reform, and most of all, regulatory reform. Even Michael Mandel of the Progressive Policy Institute believes we need to drastically reform the regulatory bureaucracy in this country.

Even if those policies don’t bring us to the historical level, I suspect they will bring us up a few points. And that means a lot in the long run.

The more mudslinging that enters the political realm, the less positive change can be done. Leftists need to stop calling conservatives idiots, bigots, and crazies; conservatives need to stop calling liberals idiots, bigots, and crazies. We need to stop. Because if we don’t, we’ll all be a lot worse off.

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