Economists can't find a way to grow the economy? They have blinders on

May 18, 2016

by Michael Stumo

Eduardo Porter, a New York Times economics reporter, wrote today that we have no way to grow the US economy because of a shrinking workforce and lack of productivity growth. He is wrong.

Porter is a posterchild for establishment economics that have gotten us into this stagnation mess with their push for free trade agreements and their advocacy for an unproductive and low-wage service economy. Here is how they were wrong.

Porter, in his article, throws up his hands on future economic growth because, he says, (1) the workforce is shrinking and (2) productivity growth is slowing.  But this can be fixed if we throw out everything Porter believes in his heart.

First, productivity is slowing because we took the advice of the establishment by shunning manufacturing as uncool dirty work and focused upon a service economy.  But a service economy cannot grow productivity and manufacturing and agriculture can. Why? Manufacturing processes can improve from making one sweater or computer chip per hour to 1,000 sweaters or chips per hour.  Adding capital and innovation allows this leap. A barber cannot improve from one haircut to 1,000 haircuts per hour.  This is something called the Baumol Effect (established by economist William Baumol).

So when politicians and economists talk about moving the US to a service economy, they are prescribing future economic pain.

Second, neoliberal trade policies that cut tariff and non-tariff barriers resulted in a 40 year trade deficit. We lost jobs and industries, on net, by buying more than we sell.  We invented new products and technologies only to see them be manufactured elsewhere by US companies or foreign ones. Trade deficits depress economic growth as the US has seen. Trade surpluses increase economic growth, as China and Germany have experienced.

Many economists said that the innovation was enough, we don't need to manufacture. But there are not enough jobs in innovation to outweigh the loss of manufacturing or to soak up our non-college or college educated workers. And those manufacturing jobs provide the productivity gains that those same economists say we lost.

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