What A Revolting Development This Is

I like to think of myself as a glass-is-half-full kind of guy, tempered with a healthy dose of realism. But lately that dose of realism has reached such proportions that it threatens to overwhelm my normally sunny disposition. I won't post a laundry list of reasons why that is so. It would take too long and be too depressing. Besides, I'm sure you're familiar enough with them yourself. But I will post one more gloom and doom article. Tomorrow, however, I promise there will be something to take your mind off all these clouds gathering over our heads. In the meantime, though, you'll have to suffer through this.

In real terms, the U.S. economy expanded by a total of $290 billion dollars in 2013. With some minor adjustments, that's essentially the amount of extra income created by the nation as a whole. It also represents the increase in the purchasing power of its residents.

By comparison, China's economy added over $800 billion dollars to its citizens spending power during 2013 alone. That's an extra $800 billion that is now available for Chinese households to purchase new products and services or to save and help fund new ideas and technologies. At this rate, China is expected to overtake the U.S. as the largest marketplace in the world by the end of the decade.

One implication of this trend is that international capital -- both financial and intellectual -- will begin to shift from the U.S. to China. As a result the chicoms will be able to invest in new and improved physical facilities and infrastructure. They will also attract the 'best and brightest' by virtue of being able to provide opportunities for innovation and growth. The U.S., in contrast, will become less and less attractive to producers and entrepreneurs.

What can be done?

A lot is beyond our control. China is already large and is still growing quickly. Although the pace is starting to slow, the yuan is still undervalued by perhaps 10 percent or 15 percent, and it is hard not to see its economy making similar size gains for the rest of the decade.

But the U.S. can and should grow faster. It needs to grow faster. For demographic and budgetary reasons. And also to ensure it remains an attractive place for biotechnology, communications, electronics and other forms of frontier knowledge. Low growth perpetuates itself.

How did we get in this mess? In short, declining workforce participation.

(Average labor productivity and economic growth) have fallen sharply in the last few years. Some of this is surely cyclical. But much is beginning to look structural. The Congressional Budget Office now estimates that U.S. economic growth will remain below post-war levels well into the next decade ... the growth in total hours worked will fall to just 0.6 percent per year. Since population growth will continue unabated well into the next few decades, this means that the average American is expected to work less and less.

The decline in working hours has been happening for quite some time now. More precisely, after adjusting for population growth, fewer and fewer Americans are working, or even trying to work. In 1999, at the height of the tech boom, over 74 percent of working-age Americans were employed. The same ratio is now 67.4 percent. That represents a loss of about 14 million workers. It also appears that those still at work are also working slightly fewer hours, although the evidence is less clear.

Reversing this trend has to be a priority for the next administration. And virtually every major domestic policy debate should be viewed from this perspective. Any policy reform that fails to deal with this issue has to be seen as an outright failure.

For example, the ongoing changes in health care law may or may not lead to improvements in the provision of quality medical care. However, their impact on the labor market is nothing short of disastrous. Once fully implemented, income-linked subsidies for individuals, combined with the employer mandates and various tax penalties, are estimated to cost us a minimum of another 2.5 million full time jobs.

Two related problems:

Reforming Social Security and immigration are two other major unresolved policy issues that will have a large impact on the incentives for households to work, on job creation, and ultimately the U.S. economy's growth potential. These have to be our primary focus.

These are the types of problems that in the past were addressed at least to some extent by our elected 'leaders.' But today's politicians are more concerned with cementing their worthless posteriors into office in perpetuity than in solving the problems we face. Until that changes (or until we change them) things will continue moving from bad to worse.