Recent editorials in the Wall Street Journal touched on several points this blog has made in different postings. One was on difficulties in the measurement of GDP and its disconnects with increases in standard of living (which is what really counts), and the other on anemic growth of GDP over recent years, and what that means for “The American Dream”.
The editorial of Prof. Feldstein on Saturday has interesting points for Sen. Gramm and Mr. Solon, in their editorial of Monday on Finding 3 % growth. We are not properly accounting for the increase in quality (which includes functionality) of what we buy, so that growth in standard of living does not correlate perfectly with growth in GDP per capita. For example, how much more does your cellphone do today, than did a similarly priced one of 15 years ago? Also, for example, when competition drives down the price of phone and data plans it will have a negative effect on GDP growth, but have we really seen a decrease in standard of living? All this says our growth rate has been better than the statistics, especially in recent years, as more “free” apps and information appear.
However, there is little doubt that we could do better, and it would improve our standard of living even more. The dead hand of regulation weighed heavily in the Obama years, and rolling unneeded ones back has many benefits. First, it reduces business costs. Second, it makes small and new businesses more able to compete with larger ones who can better afford compliance executives. Third, it creates a business environment where owners, executives and managers are more willing to take appropriate and intelligent business risk. Economist John Maynard Keynes recognized this and labeled it “animal spirits”, and never underestimated its importance. And just the cessation of business-bashing by our nation’s CEO has a beneficial effect.
We have a record number of job openings now in the US, at a time when our labor force participation has declined significantly. Possible explanations are a mismatch of skills required vs. skills available in the labor force, as well as overly generous transfer payments reducing incentives to work. GDP growth will get its greatest boost by filling those jobs, and boosting labor force participation. Government policies can affect both of those.