Treasury Secretary Lew confirmed yesterday that the United States economy faces slower long-run economic growth.
If this is the case, then Mr. Lew has also confirmed that the economic recovery we are going through is not just a traditional cyclical recovery.
We should, therefore, revise our ideas of what economic policies are needed at this time, and also revise our ideas about how we should be investing at this time.
It's official now! Jacob J. Lew, the United States Secretary of the Treasury, confirmed that the United States economy is going to grow at a much slower pace in the near future than it had during the twentieth century.
At a speech on Wednesday before the Economic Club of New York, Mr. Lew drew attention to the work of the Congressional Budget Office, which has now officially forecast that the United States economy will grow in the foreseeable future at an average rate of just 2.1 percent.
This compares with the average growth rate of the economy in the last half of the last century of a little more than 3.0 percent.
This is not inconsistent with what I have recently been writing… and what I have contended for a good portion of the last five years of the current "economic recovery."
The difference between what I have been writing and what Mr. Lew seemed to present in the speech is that I see the period we are going through as a "transition" period. What I mean when I say that the economy… both in the United States and in the world… is going through a transition, I mean that we have reached a economic "tipping point" where the economy has to go from one structural paradigm to another structural paradigm.
We apparently went through such a transition in the 1930s and 1940s as the American economy moved from an agricultural base to an industrial base. As the New York Times article states, "Even after the pro-longed Great Depression of the 1930s, growth eventually returned to an average pace of more than 3.0 percent per year."
I expect that after a number of years, the growth rate of the United States economy will pick up to something more around 3.0 percent. However, for the near term, I believe that the United States economy will continue to "drag along" at a pace substantially below this.
The reason for this slowdown is that the economy is going through a major re-structuring.
Capital utilization is much lower now than it was in the late 1960s, having gone through a pretty sustained downward trend throughout the latter part of the century.
This indicates to me that there is a lot of the physical manufacturing capacity in this country that is "out-of-date." This "legacy" physical plant and equipment must be removed from the stock of capital and replaced with what is needed in the twenty-first century.
Also, a large portion of the labor force has also become "legacy", and needs to be either retrained or replaced by new, more focused young additions to the labor force. But, the drop in the labor participation rate is to around 63.0 percent, a low figure that was seen earlier in the late 1970s and early 1980s.
If you would like to get a more informed look at what is happening… and going to happen… in the labor market and the organizational structure of physical capital, take a look at two books I have been promoting recently. These books are "The Zero Marginal Cost Society" by Jeremy Rifkin (Palgrave Macmillan) and "The Second Machine Age" by Erik Brynjolfsson and Andrew McAfee (W. W. Norton & Company).
If you want to go further into the subject, look at the work of Ray Kurzwell, a director of engineering at Google. And, if you want more reading, there are many more bits of well-researched work that can be cited.
People don't seem to like to talk about longer economic adjustments. Schumpeter did, but Keynes trumped him in the short run. Schumpeter wrote that things change over time and this change took place through "creative destruction." That is, a lot of what was, must be destroyed… this was the nature of long-term economic adjustment.
Keynes wrote that we don't need to worry about the long run, because we can bring people back to work in the jobs that they were formerly employed in. Just "goose" up aggregate demand, and they can return into the "legacy" jobs that they held… and the manufacturers can just go along as they had been doing, because now they were profitable again because of the government stimulus.
Keynes was wrong in the 1920s and 1930s… and he is wrong for today's world. According to Donald Markwell in his well-received book "John Maynard Keynes and International Relations" published in 2006 by Oxford University Press, Keynes, during this time period, was very worried about the communist revolution that was growing in Russia and in Europe and threatening his class of society. He developed his theory so as to support a plan to put unemployed people back to work so that they would not be tempted to join the revolution and change things for his people. Remember, he stated very strongly that he was not a member of the England's Labor Party.
Longer-term transitions in an economy take a considerable amount of time to be realized. We can talk about the major transition taking place in the 1930s and 1940s, but the industrial base of the United States was growing at the beginning of the twentieth century. The acceleration of this movement from the agricultural base to the industrial base only came in the late 1920s into the 1930s.
Keynesian stimulus could not reverse this trend. As many have written, it took the Second World War to end the Great Depression. One could interpret this is a slightly different way by saying that the mass industrialization that accompanied the Second World War transformed the United States into a country that was structurally different than the United States that existed in the 1920s. The "new" era was born.
Is the United States now going through another transition period, completing the evolution from an industrial base to a base driven by information technology? As the industrial base of the economy began to be noticed around 1900, give or take a few years, developments we connect with the information age began to be noticed in the 1950s and 1960s. For example, the creation of the ENIAC computer system took place in the late 1940s into the 1950s. The commercial mainframe computers came after that, in the next decade or so. And, this continued with the desktop computers, the Internet, the smartphones and laptops, and so on and so forth.
And, now… the pace is picking up even faster. We are noticing what this transformation has already done to the structure of the economy. And, we are reading more and more about what this transformation might mean in the future. The description given in the books mentioned above of what we are going through is "exponential change." That is, in the earlier stages, the change is hardly noticed. But, now, these authors argue, we are just recognizing that we are in the period when this change becomes explosive.
This explosive change has to be dealt with, and this change is causing a massive re-structuring of the United States economy. It is this massive re-structuring that we are going to have to deal with… and there will be a lot of pain in the adjustment.
We, of course, must do what we can to deal with the "pain", but, at this stage of the exponential adjustment, we cannot go back and produce economic policies that attempt to re-create the past as Keynes tried to do. We must accept the "creative destruction" that is taking place and move with it.
In order to do so, we may need a Federal Reserve "put"… or, Yellen "put"… to protect the economy from the downside. This "put" may be in the form of quantitative easing or excessively low interest rates. And, this will create opportunities for some people to make a lot of money. But, that happens!
What is important for us to recognize is that something different is happening. We need to recognize that the United States is not just going a "regular" cyclical recovery.
If the government is starting to realize this, and Mr. Lew's remarks seem to indicate that some change in opinion is taking place with governmental circles, then this is a step in the right direction.
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