Waiting for a Piece of that Yummy Pie
Glenn Hubbard says the public is wrong about the economy. It's a good economy and the only worry people should have is that taxes might go up:
Hidden Treasury, by Glenn Hubbard, Commentary, WSJ: President Bush's selection of Hank Paulson to be the next Treasury secretary is cause for ... reflection on the economy's performance ... [M]any forecasters estimate that GDP growth over the full year will be in line with the economy's potential GDP growth... Outside the U.S., much improved growth prospects for Japan and nascent growth in Europe are good news for global activity.
Yet the public's anxiety over the economy does not align with those headlines. One possibility is that the economy's performance simply is not as good as the data suggest. In this view, Americans used housing equity gains to finance consumption, expanding the already large current account deficit. As housing price appreciation starts to vanish, the engine for spending growth stalls, and foreign investors may lose faith in the U.S. economy's spendthrift ways.
While such a story offers drama, economic practice is likely to be more subtle. Flattening house price growth -- embedded in forecasts of reasonably good GDP growth -- will lead consumers gradually to raise saving. And the recovery's strength has already rotated to business capital spending. Gradually rising U.S. saving and a pickup in domestic demand growth in key emerging economies should facilitate gradual adjustment of U.S. external imbalances.
Proponents of the "imbalances in the recovery" view often suggest that public policy played an unwelcome role. The Fed pursued an accommodative monetary policy ... and that policy stimulated the housing market, consumer spending and the current account deficit. Inflation risks are a legitimate concern. But can one seriously believe that a much tighter monetary policy over that period would have proven better for incomes and employment?
And tax policy? Investment incentives, lower marginal tax rates and cuts in dividend and capital gains taxes promoted investment at a time when investment decisions faced many headwinds... Are we to believe that higher marginal tax rates would have led to better outcomes for output and employment over the past five years? Should we think that raising taxes on capital income would be an encouraging sign for foreign investors about the U.S. investment climate?
While pundits' hand-wringing about the economy misses the mark, there is a void in talking about the big story -- the extraordinary performance of productivity growth in the U.S. economy over the past decade. Productivity growth has accelerated a full percentage point.... And this growth reflects the power of openness, innovation and entrepreneurship in the economy...
It is tempting to credit "technology" with our central success story. But ... these companies did not become more productive simply by buying faster computers. They became more productive by having managers and entrepreneurs who faced global competition and knew how to integrate these investments with new business models to raise productivity. ... To maintain growth, we must resist the strong political pressure to protect existing "jobs" and "firms." Rather, well functioning labor and capital markets -- cushioned by public support for training and education -- offer a better route to success.
Many question whether workers are sharing in the surplus created by faster productivity growth. In a competitive economy, workers should see the benefits of higher productivity. And looking at postwar data for the U.S., productivity and real compensation grow together.
But at the same time, the co-movement is not instantaneous. In the mid-1990s, for example, higher productivity was not immediately reflected in compensation. GDP growth at roughly potential in 1994 was drowned out by worries over job cuts and downsizing until compensation shared more fully in productivity growth's dividends later in the decade. ...
But there is real danger. A legitimate fear is likely weighing on the public's mind -- a large tax increase that could leach the innovative capacity of our vibrant and entrepreneurial business sector and eliminate the growth dividend of the past decade. ... Secretary Snow has rightly celebrated the economy's success, and Mr. Paulson will no doubt do so as well....
The biggest, best pie ever is on the table and one group is having a feast. Fat and happy they are.
This group, managers and entrepreneurs are, after all, the ones responsible for increasing productivity so they should get to eat first:
They became more productive by having managers and entrepreneurs who faced global competition and knew how to ... raise productivity.
The other group is told they will have to wait to get their share of the pie, hopefully not too much longer. They are not fat, and they are certainly not happy.
It is noted that workers also had to wait for their share when pie making technology improved in the 1990s, so they should be used to waiting by now. And workers shouldn't worry that the pie was financed by borrowing from neighbors, there is a plan to take care of that. Tax cuts will ensure that there will be more than enough pie to give everyone what they've been promised.
The fat and happy crowd cannot understand why those eating nothing but promises aren't as happy and worry free as they are.
Posted by Mark Thoma on Monday, June 5, 2006 at 10:03 AM in Economics, Politics |
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