Perspectives on the U.S. Economy

Transcription

1 Perspectives on the U.S. Economy Presentation for Irish Institute Seminar, April 14, 2008 Bob Murphy Department of Economics Boston College

2 Three Perspectives 1. Historical Overview of U.S. Economic Performance 2. Comparison with European and Irish Experience 3. The Current Economic Crisis and the Outlook for Small Business

3 U.S. Historical Perspective Productivity Slowdown from 1973 to 1995 and Resurgence from 1995 to?? Great Inflation of the 1970s and the Disinflation of the 1980s Great Moderation of the 1990s Remarkable Decline in Unemployment from the 1990s onward First, however, a quick overview.

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7 The Productivity Slowdown Starting about 1973, productivity growth slows sharply Timing suggests first oil price shock is a likely factor But productivity growth doesn t rebound in mid-1980s when oil prices decline

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10 The Productivity Slowdown Canada France Germany Italy Japan U.K. U.S. Growth in output per hour (percent per year)

11 Possible Explanations for the Productivity Slowdown Measurement problems: Productivity increases not fully measured. But: Why would measurement problems be worse after 1972 than before? Oil prices: Oil shocks occurred about when productivity slowdown began. But: Then why didn t productivity speed up when oil prices fell in the mid-1980s?

12 Possible Explanations for the Productivity Slowdown Worker quality: 1970s - large influx of new entrants into labor force (baby boomers, women). New workers tend to be less productive than experienced workers. The depletion of ideas: Perhaps the slow growth of is normal, and the rapid growth during is the anomaly.

13 Which of these suspects is the culprit? All of them are plausible, but it s difficult to prove that any one of them is guilty.

14 Productivity Resurgence in the United States Pickup in productivity growth apparent after 1995 Evidence suggests this has been due to information technology (IT): Investments in computers, software and the redesign of business systems to fully utilize information technology

15 Examples of Advances in IT The real price of computer power has fallen an average of 30% per year over the past three decades. Percentage of U.S. households with 1 or more computers: 8% in 1984, 62% in : 213 computers connected to the Internet world-wide; by 2000: 60 million computers connected to the Internet 2001: ipod capacity = 5gb, 1000 songs. Not capable of playing episodes of the TV show American Idol. 2005: ipod capacity = 60gb, 15,000 songs. Can play episodes of American Idol.

16 I.T. and the New Economy Apparently, the computer revolution did not affect aggregate productivity until the mid-1990s. Two reasons: 1. Computer industry s share of GDP much bigger in late 1990s than earlier. 2. Takes time for firms to determine how to utilize new technology most effectively. The big, open question: How long will I.T. remain an engine of growth?

17 Productivity Growth Remains Depressed in Europe Unlike the U.S., productivity growth does not rise after 1995 Some important exceptions: UK Ireland

18 I.T. and the New Economy Canada France Germany Italy Japan U.K. U.S. Growth in output per hour (percent per year)

19 IT and the New Economy Growth in output per hour (percent per year) EU U.S Source: van Ark et al. (2008).

20 I.T. and the New Economy

21 Why Has Europe Lagged? Lower contribution from investment in IT Relatively small share of technology producing industries Slower gains in innovation and implementation of IT in the economy Higher degree of regulation of product markets Rigid labor markets

22 Sources of Productivity Growth: (average annual percent change) United States EU-10* Output per Hour Labor Composition IT Capital per Hour Non-IT Capital per Hour TFP Contribution from Knowledge Economy (=1+2+4) Source: van Ark et al. (2008). Note: Data are for market economy excluding public administration, education, health, defense, and real estate. EU-10 is Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Spain, and the United Kingdom.

23 Major Sector Contributions to Productivity Growth: (average annual percent change) Output per Hour 1. IT Production 2. Non-IT Goods Production 3. Market Services 4. Reallocation of Labor United States EU-10* Source: van Ark et al. (2008). Note: Data are for market economy excluding public administration, education, health, defense, and real estate. EU-10 is Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Spain, and the United Kingdom.

24 Contributions to Productivity Growth in Services Sector (average annual percent change) United States EU Output per Hour Distributive Trade Factor Intensity TFP Finance and Business Factor Intensity TFP Personal Services Factor Intensity TFP Reallocation of Labor

25 Why Has Ireland Outperformed? 1987 Tallaght Strategy--Fiscal consolidation, exchange rate stability, and social agreement between workers and business leaders to moderate wage growth. Increased incentives for inward foreign direct investment: Industrial Development Agency (IDA) Corporate tax structure Sets stage for economic boom of 1990s

26 Sources of Growth: Ireland and EU 15

27 Ireland s Growth Performance: Contributions from Labor Input Labor force participation rises as more women join workforce--now about 52% up from 34% in but still below EU average and US (each around 60%) Migration flows reverse leading to positive net inward migration Skills of labor force increase as new entrants are better educated

28 Migration in Ireland,

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30 Ireland s Growth Performance: Contributions from IT , Ireland attracts 40% of America IT investment in Europe (electronics and pharmaceuticals) Multinationals generate export-led growth Two channels: Capital Intensity TFP But, do the numbers overstate growth?

31 Ireland s Growth Performance: Overstated? GNP (National Income) grows more slowly in the 1990s than GDP as 80% of multinational profits are repatriated. Evidence that multinationals reduce their investment rates in the 1990s--using Ireland mainly for production not R&D. Transfer prices may have overstated measured GDP since multinational firms had strong tax incentives to book profits on operations in Ireland rather than elsewhere. But, even so, economic performance far outpaces that of Europe.

32 The Great Inflation and Disinflation in the United States 1970s stagflation Paul Volcker appointed Fed Chair in 1978 Volcker engineers shift in monetary policy toward goal of reducing inflation Develops a credible policy approach that involves sharply slower growth of the money supply

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35 The Great Moderation in the United States Volatility of output growth declines significantly in the 1990s Volatility of price inflation declines in the 1990s Good luck or good policy?

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37 The Remarkable Decline in Unemployment in the United States Long-run or natural rate of unemployment declines in the 1990s No sign of excessive wage or price pressures Recession of 2001 has only modest rise in unemployment A return to the 1960s?

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40 The Remarkable Decline in Unemployment in the United States Shifting demographics of the labor force Rise of the temporary help industry Growth of the prison population Shrinking share of union workers Increased diversification of regional economies Improved efficiency in labor markets--payoff from implementation of IT both in production (just-intime inventory management) and in job matching

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47 Summary: Historical Overview Overall, U.S. economic performance exceptional in last part of 20th Century On productivity growth and unemployment, Europe lags, with important exceptions: Ireland One are of important concern: income inequality in the U.S. has widened U.S. now experiencing a major financial crisis with course of the economy for the next year or so very uncertain

48 The Current Economic Crisis U.S. economy is on the brink of recession Severe downturn in housing sector now spilling over to rest of economy Policy actions on fiscal and monetary fronts to support the economy Extent and length of recession remains uncertain

49 Signs of Recession GDP growth slowed sharply in 4th quarter 2007 Employment has fallen for past three months with nearly 250,000 jobs lost Income growth has slowed and consumer spending has stagnated since late last year Manufacturing production has dropped since end of 2007

50 Housing Bubble Has Burst Home prices are falling across the U.S. Delinquency rate and foreclosures on mortgages are up--roughly 8 percent of all mortgages (about 4 million) are now in trouble Residential construction sector is in deep recession Spillover from sub-prime mortgages to broader financial markets began last summer and continues to worsen

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52 How did we get to this point? Greenspan eases monetary policy following stock market collapse, recession of 2001 and September 11 Extraordinary appreciation in housing values resulting from cheap mortgage credit Premium placed on getting your mortgage and closing the deal Borrowing shifts toward non-conforming mortgages with riskier pricing structures Homeowners believe they will gain from home appreciation and refinance in a few years

53 Financial Market Distress Concern arises about other types of asset-backed securities (credit card receivables, auto loans and regular mortgage debt). Markets for these types of securities become illiquid. Commercial and investment banks holding these securities begin to recognize impact on balance sheets. Fear that banks will be unable to complete transactions leads financial markets to freeze up. Investment bank Bear Stearns suffers a classic bank run as clients pull money out of their accounts.

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56 Policy Response Federal Reserve has cut overnight lending rate from 5.25 percent to 2.25 percent. Federal Reserve has created new lending facility for investment banks. Federal Reserve has offered to swap Treasury securities for non-performing assets (sub-prime mortgage backed securities and other CDOs).

57 Policy Response, continued Overall, Federal Reserve has committed nearly $500 billion toward new mechanisms--about half of its balance sheet. Congress has passed and the President has signed a tax rebate valued at about $150 billion to help stimulate consumer spending. Additional measures to aid homeowners are under discussion--federal Housing Administration would insure new loans to homeowners in distress.

58 Outlook for Crisis Key issue will be stabilizing financial markets and improving willingness of banks to lend. Outstanding question is how deeply consumers will cut back on spending. Stimulus package should have effects by third quarter of the year. Declining value of dollar will work to improve net exports and help cushion economy.

59 Outlook for Small Business Terms of lending have tightened significantly for small business but in line with larger businesses. To extent small business is export-oriented, decline in value of the dollar represents a positive factor. Credit costs have risen significantly.

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62 Overall Outlook Remains Uncertain Average unemployment duration now 16 months, higher than at start of last two recessions (12 months) Inflation remains a concern with oil price rise still working through system Weak dollar presents a potential dilemma for policy Housing sector will need to bottom out before recovery begins--how long will it take?

63 Bank Credit Standards for Small Firms (less than $50 million in sales)

64 Bank Credit Standards for Large and Middle-Market Firms (more than $50 million in sales)