Investors and traders here were hoping that a spurt in job creation would dispel some of the gloom that has stock markets in turmoil, investors watching a decline in the value of their savings and pensions, and Federal Reserve Board chairwoman Janet Yellen and her monetary policy committee scrambling to back off an implied promise to raise interest rates four times this year. The latest jobs report provided a bit of cheer, but not enough to lift the weight of bad news from the shoulders of economy watchers. The economy added 151,000 non-farm jobs in January, the unemployment rate dropped to 4.9 percent, and average hourly earnings rose a non-trivial 0.5 percent, bringing earnings growth for 2015 to 2.5 percent, not bad in the absence of significant inflation, and showing signs of picking up as the labor market tightens. But add workers too discouraged to look for jobs and part-timers hoping for full-time work, and the so-called U-6 unemployment rate remains stuck at a tick below 10 percent. Chris Williamson, chief economist at Markit, a provider of financial information, summarizes the report as containing, "Signs of a slowdown in hiring, still-weak annual pay growth and disappointing survey data…".
Foreigners tend to think of us as an optimistic, can-do bunch. And by and large we are. But two old strands in America's sometimes view of the world are emerging. And they are far from optimistic. One holds that all of the great, productivity-enhancing, growth-producing inventions have already been made. The other is that our economy tends to over-save and under-invest, leaving a spending gap that the government must fill if demand is to prove adequate to maintain full employment.
Add a new one: Things are out of control, traditional institutions no longer can affect the course of the economy. No matter what politicians say about getting the nation's finances under control, the deficit continues to rise. No matter what they say about keeping corporations from fleeing an untenable tax structure, they can't agree on reforms. No matter what the Federal Reserve Board does to increase the rate of inflation, it remains below target, and the Bank's ability to end the era of zero interest rates runs aground when a soaring dollar slows the economy. No matter how much the political class complains about rising inequality, bankers only recently saved from the poor house by taxpayers continue to cash huge checks while the middle class struggles with incomes that have not increased in years.
This new set of anxieties and frustrations increases receptivity to an older set. There has long been a strand in American economic thought that contends that our best days are behind us. It takes various forms: we have reached peak oil and are running out of other resources or, more recently, a warming globe will make the planet uninhabitable unless we end our use of fossil fuels. Most important, our best days are behind us – there will be no New American Century. That's the message of a beautifully researched and written new tome by Northwestern University economics professor R.A. Gordon. In the century that began in 1870 everything that could change Americans' lives in a major way was invented, driving up living standards and worker productivity. "The economic revolution of 1870 to 1970 was unique in human history, unrepeatable because so many of its achievements could happen only once." The invention of electricity replaced darkness with light, and the internal combustion engine replaced isolation with travel. There's more, but you get the idea.
If you're insufficiently gloomy when you put down professor Gordon's 768-page volume, you can call up any one of the recent speeches and articles by Harvard professor and former Secretary of the Treasury Larry Summers. Summers believes we have entered an era of secular stagnation, a period in which private sector investment and demand for goods and services are insufficient to fuel rapid economic growth. This is a revival of an idea developed by Harvard professor Alvin Hansen, an über Keynesian, in 1938, when our economy was in the doldrums. It faded from sight in the post-war boom years, the early decades of which included Gordon's golden era of invention and innovation. Summers' re-introduction of the secular stagnation thesis into policy debates is intended to support infrastructure spending by the government to fill the gap in overall demand, a serious version of Keynes' quip that unemployment could be cured if the government would bury bottles full of banknotes in abandoned coal mines and let private sector players bid for the right to dig them up. It would be better to build houses, Keynes added, but if "political and practical difficulties" make that impossible, bottle digging is better than nothing. Summers has not gone that far.
There is no doubt that the economy is struggling, but don't plan a funeral for Rosy Scenario just yet. Instead, take the angst about the long-term outlook with a fistful of salt. As David Smith, my colleague on London's Sunday Times, pointed out in his recent review of Gordon's book, "If you believe that we have barely scratched the surface of the 'internet of things', 3-D printing, robots and breakthroughs that are currently just a twinkle in the inventor's eye, you will be sceptical of Gordon's techno pessimism…. Human ingenuity is nowhere near its limits and neither, one hopes, is economic growth." Spoken like a true American optimist. Just as no one at the start of Gordon's golden age in 1870 could have anticipated what was to come, so no one now can guess what the next breakthrough will be. But we do know that whatever it is, venture capitalists will be scrambling to accelerate its development and marketing.
Which leaves Gordon's concern about declining productivity. Yes, output per man hour has averaged only about 1 percent during the recent recovery, less than half the rate before the Great Recession. But that slowing might be due to our difficulty in measuring the impact of Information Technology. Erik Brynjolfsson, director of the MIT Initiative on the Digital Economy, notes, "The one certainty is that the measurement problem is becoming more severe. Developed nations are devoting increasing shares of their economies to service- and information-intensive activities for which output measures are poor."
And if Summers' secular stagnation thesis bothers you because its cure seems to be more deficit spending to pay for infrastructure, consider this. The impediment to more rapid growth might not be inadequate demand. It just might be the thousands of regulations churned out every year, inefficient taxes, and other burdens borne by the supply side of the economy. Get rid of some of those, and the U.S. economy might recover its aplomb.