What Next?

Posted by on . 2 comments.

Atrios writes:

The problem with low housing starts is that residential investment tends to be one of the first things to pick up during a recession. For obvious reasons that’s not happening. But if not residential investment, then what?

As Yglesias says, you wouldn’t really expect residential investment to lead us out of recession this time, since the thing that got us into recession was the massive housing overhang generated by the bubble. (Though, important caveat: not all housing is created equal; some markets are fairly tight and will begin seeing increasing investment soon while others will have an overhang for decades). But the if not residential investment, then what point is one of the stickier issues out there.

You see, there are fairly standard ways to break down economic output. It includes things like consumption, residential investment, non-residential investment, inventory accumulation, net exports, and government spending. Right now, everyone is looking at those categories, stroking their chins, and wondering where the growth is going to come from. For a long time now, consumption has been the primary engine of growth, but for many reasons that is likely to change (perhaps most importantly, it looks like long-term saving trends may begin to reassert themselves). Japan pulled itself out of its lost decade through an export boom, but that’s not exactly something to which America is well suited at the moment. It’s not clear what products would be exported to which markets in volumes sufficient to deliver steady, high growth. Government can’t deliver steady growth on a long-term basis. Housing investment, as noted, is going nowhere. Non-residential investment is actually in worse shape than residential investment at the moment, since it’s more of a lagging indicator.

So we’re all puzzling and puzzling over what’s going to get us growing again. I’m an optimist about the economic situation, and I’m puzzling right along with everyone else. It’s for that reason that I’ve mused on possible ways to direct new investment, that is, using carbon prices or gas taxes to channel investment toward clean energy, efficiency technologies, transit, and investment in denser residential patterns. Make it clear that there will be new demand in one market or another, and investment — and growth — will follow.

All of the above takes place at several levels of remove from the facts on the ground, which are these — resources are not well placed to begin a new phase of growth. The workers out there losing their jobs in contracting industries are ill-equipped to move into more promising industries. A lot of capital has been sunk into low performing investments while other investment opportunities have gone ignored. Basically, there’s a mismatch between what we’ve got and what the economy can use, such that when the recession ends and healthy industries are fully staffed up, growth will underperform its recent trend level and unemployment will stabilize at a higher level than we’re used to.

This is not at all unprecedented. America has had its sluggish decades, Europe has had various sick men at one point or another, Japan had its lost decade, and so on. Sometimes economies seriously underperform as they work out some structural difficulties. I see nothing to indicate that we shouldn’t view the coming recovery through this lens.

And yet, I’m uncomfortable with this interpretation — that since none of us can think of what might lead growth to trend levels there is clearly nothing out there to lead growth to trend levels. I fully admit that this might just be my optimism talking. But what do we really know about all of this? It’s not as if the pace of tecnological innovation has slowed. It’s not as if there isn’t an ongoing revolution in information and communication technologies. It’s not unreasonable to think that we may soon experience heavy demand for all kinds of clean energy goods and services. I expect growth to be subpar in 2010 and 2011, but I have to say, I’m not sure how appropriate it is to fret about potential growth beyond that.

The obvious concern is all this innovation is wonderful, but most Americans aren’t trained to take the necessary jobs. Maybe! Certainly more training wouldn’t hurt! But I don’t really have to break my imagination to envision plenty of blue collar employment opportunities. I’m all for an ambitious policy approach to the situation, but at the same time, I can’t help but be fairly sanguine about our prospects. Just my nature, I suppose.

Comments

  1. jult52 says:
    May 19, 2009 at 12:04 pm

    Whether clean energy technology will actually result in net job growth appears to be controversial.

    See the attached Bloomberg story, which references a Spanish economic study.

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2PHwqAs7BS0

    The MediaMatters site attacks the author, Gabriel Calzada, but uses a report from another highly-biased source, the Center for American Progress.

    http://www.americanprogress.org/issues/2008/09/pdf/green_recovery.pdf

    Here’s a WSJ article on the issue that disputes Calzada’s thinking.

    http://blogs.wsj.com/environmentalcapital/2009/03/30/green-jobs-ole-is-the-spanish-clean-energy-push-a-cautionary-tale/

  2. Karl Smith says:
    May 19, 2009 at 3:00 pm

    There are a couple of deep issues here that go beyond simple growth accounting.

    First, however, I would like to point out that per household consumption does not have to rise to its former level to provide some support to economic growth. It only has stop falling and begin to grow at a sustainable rate.

    This permanently lower growth path is what I see as the most likely scenario.

    More generally, as I am sure many have pointed out, higher savings and slow growth necessarily imply low real interest rates. This is the perfect time to invest in major infrastructure.

    I imagine that much of that investment will be the expenditure of public money, but this is fine as it raises long term potential GDP and the real cost is low. Deficits to finance investments are, of course, in general a good idea.

    More deeply, however, low real interest rates should make private investment more attractive, both in the US and abroad. To some extent this is blunted by the fact that the economy is well below capacity. Though even that shouldn’t be taken to mean no investment because while there might be lots of excess capacity in say SUV manufacturing that does not mean there is excess capacity in smart phone design or new pharmaceuticals.

    This is why it is important for consumption to resume sustainable growth. When that happens it begins to make sense for investment to take advantage of low interest rates.

    However, suppose, as in the case of Japan, that does not happen. Investment does not increase. What is that saying. I fear it says something fundamental about the returns to capital.

    In the last few decades when have seen signs that the fundamental return to capital might shrink. One subtle sign is in the size of products. It might sound silly at first but if the size of products is shrinking, might that portend then need for smaller machines. More complex machines to be sure but not bigger machines. For some time I have wondered about how this might affect the income shares of the engineer vs. the investor.

    After all, once it becomes purely a design problem with only tiny bits of actual machinery, should all the rents accrue to the engineer.

    At a more macro-level we have seen a cycle of quick booms and busts that has the feel of capital chasing potential investments rather than potential investments chasing capital.

    We have also seen a meteoric rise in the salaries of highly specialized labor.

    Is this the beginning of the declining importance of capital, together with a rising importance of technology and education?

    We used to think of the production function as Land, Labor and Capital. Land is gone now and that has had real consquences. The data on income inequality shows that at the turn of the century the dominant form of income among the wealthiest .1% was rent. By mid-century that had shifted to dividends. Now it is shifting towards salary.

    If we are looking at a declining return to capital then this is disquieting, not least because the West and Northeast Asia have an aging population that is implicitly depending on the returns to capital to support its retirement.

    Whether or not this is the case may in part be answered by how the global economy recovers from this downturn. An investment led recovery will imply that capital’s income share safe. Anything else, may be cause for concern.