Fed Chair Janet Yellen is saying the Fed could keep rates low for a long time to come in her current congressional testimony. Why? Because unemployment is still too high, and economic growth too slow at present.
This is in part because the Congressional Budget Office has said thanks to the lingering effects of the recession, the aging of the country, the shrinking of the labor force, and various tax and spending policies, the nation now only has the potential to grow about 2.1 percent per year over the next decade, on average.
We believe, though present economic conditions are still uncertain, that is far too pessimistic an outcome. For starters, GDP growth has averaged more than 3 percent over the long term, including the Great Depression. And no one is taking into account the next generation, the Gen Y'ers or Millennials entering the workforce, which because of their size should kick start growth and obviate the worries about soaring budget deficits as the baby boomers retire.
In the last two decades US growth rate has been steadily decreasing. The 50's and 60's average growth rate was above 4 percent, It dropped to around 3 percent in the 70's and 80's. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.
Yet if government was ever allowed to create jobs again, we could have above average job creation, and so higher GDP growth for decades to come. The New Deal proved that. When New Deal spending kicked in, it boosted growth by literally creating millions of WPA, CCC jobs that resulted in new highways, bridges, dams, and the care of natural resources. Conversely, when government spending was cut back prematurely in 1937 in an attempt to balance the budget, the Great Depression resumed.
Especially spending on public infrastructure stimulates the U.S. economy in the short-run, given that there is some $2.2 trillion in deferred infrastructure maintenance, according to the US Society of Civil Engineers. Investing in infrastructure goes beyond mere improvements to the quality of roads, highways, sewers, and power plants. These investments also generate "significant economic returns for other portions of the U.S. economy and substantially increase ultimate tax revenue for the government," according to a 2012 College of William & Mary academic study.
And what about demographics, the assertion that since baby boomers are retiring, the work force will shrink rather than grow, further cutting GDP growth? Ah, but we are forgetting to look at the so-called Millennium generation born between 1981 to 1998, which numbers more than 70 million in the US alone. In fact, one commentator maintains, starting around 2020 (or a few years after 2020), the U.S. should see another robust growth period similar to the period enjoyed by the baby boomer generation. This is because there will be just as many new workers in the work force from the Gen Y or Millennial generation as there were in the baby boomer generation.
Barron's Magazine has also been looking at the Millennials' potential. For one thing, the Millennials -- sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37 -- make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7 percent larger than the baby-boom generation, which came of age in the 1970s and '80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.
This echo-boom generation totals 27 percent of the U.S. population, less than the 35 percent the boomers represented at their peak in 1980. When the baby-boom generation drove the economy in the 1990s, growth in gross domestic product averaged 3.4 percent a year. As the Millennials hit their stride, they could help lift GDP growth to 3 percent or more, at least a percentage point higher than current levels, says Barron's.
So there's no reason to be so pessimistic about economic growth and a soaring federal deficit for decades to come. If GDP growth is that dependent on workforce growth, and 1990's growth repeats itself--which was the longest uninterrupted economic expansion in our history that also gave us 4 years of budget surpluses--then we may see the next generation about to take charge. They could turn out to be much more industrious than we know!
Harlan Green © 2014
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