In a WaPo oped today, Larry Summers takes a pretty gloomy view of the growth prospects of the US economy, and he throws Europe and Japan in there too for good measure. Larry’s always worth listening to on such matters, so let’s take a brief, closer look.
Larry’s been righteously worrying about the economy’s demand side for a while now, including as a participant in our full employment project, wherein he co-authored this important paper with Larry Ball and Brad DeLong advocating better–as in “more responsive to slack”–fiscal policy. And, of course, his “secular stagnation” hypothesis, as he noted today, “…has emphasized the difficulty in maintaining sufficient economic demand to permit normal levels of output.”
But in this piece he adds concerns about constraints on the supply side of the economy. It’s a serious concern and one which points toward potentially lower growth, weaker labor supply (Summers’ main focus), and slower productivity growth.
Basically, Larry figures that the job market is already tightening up, and given the underlying pace of monthly job growth–something north of 200K–and the stagnant-at-best trend in the labor force participation rate, we’re likely to hit labor supply constraints at some point.
A simple calculation reveals that the unemployment rate would fall to the 4 percent range by the end of 2016…While such a low unemployment rate is conceivable, it seems more likely that employment growth will slow at some point, either because of employers having difficulty finding workers, rising wages or government policy decisions. In any of these cases, the economy would be held back not by a lack of demand but a lack of supply potential.
Um…sure, I guess…but that seems like an awfully high class problem to have, and I don’t see what good it does worrying about it now. To the contrary, such a focus risks sharpening the talons of inflation hawks who would pre-empt the expansion from the demand side well before Larry would like, I’m sure.
Moreover, while I grant Larry and others the US demographics that are baked in the cake, we really don’t know the full extent of the labor supply constraints. It’s entirely possible, for example, that strong and persistent growth would relax that particular constraint, pulling more people back in to the job market.
And even if I’m wrong about that, we do know that much slack still exists both in terms of employment and the output gap. According to my CBPP colleagues: “In the second quarter of 2014, the demand for goods and services (actual GDP) was roughly $725 billion (about 4 percent) less than what the economy was capable of supplying (potential GDP).”
There’s great disagreement about how much more the labor force could grow, but summarizing a lot of what I’ve read on this, I think there’s at least one percentage point in the LFPR that’s up for cyclical grabs, equal to 1.5 million workers. And what you really want to ask in this part of the debate is “just how structural is structural?” meaning how unreachable are those who appear to be pretty solidly out of the job market, like prime-age, non-college educated men?
And while I get that boosting supply amidst weak demand generates its own problems, it is that case–as Larry mentions–that a welcoming version of immigration reform can provide a labor supply pressure valve.
That said, if we want to reduce inequality, rebalance “factor shares” (the skewing of the profit versus the wage share of national income), and bring a lot more households along in this recovery, we need more pressure from the demand side.
So even without digging into the maybe-inaccessible structural parts missing from the economy’s supply side, there 4% of GDP, another percentage point of the labor force, a few percentage points of shifting income from profits to wages, and another 1.5% of nominal wage growth before we hit any supply constraints.
Like this catchy, recent pop song says, let’s not make this harder than it has to be.