The Heart of the U.S. Economy Is Weaker Than It Looks
A few years ago, I was among the many people arguing that the fundamentals of the U.S. economy were strong. I believed that the slow recovery from the Great Recession wasn't a new normal, and that the U.S. would return to something close to the steady levels of growth it enjoyed during the 20th century.
I’m now reconsidering that position. Some fundamentals look considerably weaker than they did a decade ago. Others are now uncertain, and depend heavily on what President-elect Donald Trump does once he takes office.
The U.S.’s greatest strength has always been immigration. Because of the country's extraordinary willingness to take in newcomers, the U.S. population has grown by a factor of more than 120 since 1776. The U.K.’s population, in contrast, has grown by only a factor of 10. More recently, a relatively young U.S. population helped the country avoid many of the economic problems that plague Europe and Japan.
Many immigration opponents point to the period before 1965, when entry to the U.S. was strongly curtailed, as an example to follow. But there was a big difference between then and now: fertility rates. From its low point during the Depression to 1965, U.S. fertility never went below the replacement rate of 2.1, which is what a country needs in order to have a stable population in the long term. For much of the period it was much higher, peaking at more than 3.5 during the baby boom. In the early 2000s, U.S. fertility stayed at about the replacement rate, but since the 2008 crisis it has fallen below the level, driven mainly by a collapse in Hispanic fertility. With each American woman now expected to have fewer than 1.9 children in her lifetime, the native-born population is no longer reproducing itself:
So if Trump strongly curbs immigration, the U.S. will encounter problems similar to those of Japan, Germany and other wealthy slow-growth nations. A smaller working population will have to support an ever-increasing number of elderly people, putting a strain on Social Security, the health care system and family finances.
Of course, immigrants are important for reasons other than population increase -- they are much more entrepreneurial than the native-born. Another of America’s fundamental strengths, entrepreneurship, depends on taking in bold, risk-taking immigrants. Let’s hope, therefore, that Trump’s September pledge to admit more high-skilled immigrants wasn’t just talk.
Economic dynamism is traditionally another fundamental U.S. strength. But this too is rapidly falling, as the U.S. starts to look more like other rich countries. Economists have been observing simultaneous drops in almost every measure of dynamism they can think of. Fewer business are being started, even in the vaunted tech sector. Employees are switching jobs and moving less than they used to. The traditional image of Americans as bold, self-starting, risk-takers no longer holds true, as people shift toward working for big companies.
No one knows exactly why this is happening, but the Barack Obama administration was taking a few steps to try to counter the decline. It had begun to attack regulations that hold back dynamism, from real-estate development restrictions to occupational licensing. It was preparing to crack down on monopolies and noncompete agreements. Now, it’s unclear whether Trump will carry on any of these policies, since his advisers will almost certainly include very few of Obama's proposals.
Other U.S. fundamentals had begun to decay long ago. The U.S. used to lead the world in educational achievement, but is now in the middle of the pack, as soaring college tuition puts the brakes on post-secondary education. The U.S. interstate highway system is the best in the world, but excessively high infrastructure costs and a lack of willingness to spend money on repairs puts that at risk.
There are some signs Trump will attack these problems. He has suggested putting a cap on student-loan payments, and has promised to spend much more on infrastructure. These would be positive measures, though they won’t do much to rein in the inflated cost problems in either sector.
A final problem with U.S. fundamentals is health care. U.S. health spending far outstrips that of other rich countries, despite similar quality of care. Obamacare looked like it was holding back health-care cost growth. But the Republicans who now control Congress want to scrap Obamacare, and Trump might let this happen. That could cause costs to start rising faster once again.
So the U.S. fundamentals look worse than they did in previous decades. Making America great again will require bold, smart policies, a welcoming attitude toward immigrants and probably a bit of luck too.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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