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Good timing may not be everything. But it sure does help.
That looks to be the case when it comes to President Joe Biden’s drive to reverse a decades-long decline in U.S. economic dynamism. While Biden’s efforts on their own are likely to yield only limited results, they come at a time when some economists see the U.S. as primed for a sustained run of stronger growth.
After more than a year of business restrictions and social distancing aimed at slowing the spread of Covid-19, companies are poised to increase efficiency and employees are eager to return to work — in what could mark the start of an extended period of faster productivity advances and an expanding labor force.
“We have a lot of catching up to do” after a decade of depressed productivity growth, said Robert Gordon, a professor at Northwestern University and author of the 2016 book “The Rise and Fall of American Growth.”
Biden has already set the stage for an ultra-rapid economic recovery this year and next by pumping money into people’s pockets, with his $1.9 trillion American Rescue Plan. What he’s trying to do with his next two packages is something more difficult: Lift the economy’s capacity to expand over a prolonged period without generating excessive inflation.
Since 2000, the nation’s gross domestic product has increased at an average 2% annual pace, compared with a 3.3% clip in the 20 years prior. While that faster rate is likely well out of reach now because of an aging population, some increase in potential is possible with the right policies.
Biden’s $2.25 trillion “American Jobs Plan” primarily aims to lift long-run growth by significantly ramping up spending on productivity-enhancing infrastructure such as better broadband coverage and improved transportation links.
His forthcoming “American Families Plan” will focus on enlarging the pool of Americans — especially women — available for work, through increased funding for child care, education and other government programs.
The two proposals are set to be funded through higher taxes on companies and the wealthy, something that some economists say will hurt growth. The hope is that stronger investment and an expansion in the workforce will ultimately prove to more than make up for that.
A higher speed limit is the holy grail for the economy. It means more prosperity for working Americans and more profits for companies.
It’s also good news for policy makers. Speedier growth makes the federal government’s mammoth debt more manageable because of the extra tax revenues it generates. A higher speed limit gives the Federal Reserve more room to allow the economy to grow faster and unemployment to fall further before any monetary-policy tightening.
Large dollops of government aid and rock-bottom interest rates laid the groundwork for super-charged growth of 6.3% this year, according to economists surveyed by Bloomberg. And now there are signs the pandemic has forced changes in business practices, such as stepped-up online marketing and increased automation, that could lead to stronger productivity.
“The biggest, lasting dividend from the past year is a changed way of working, I think — going faster, being more adaptable, applying a growth mindset at every turn,” Hyatt Hotels Corp. President Mark Hoplamazian told a Bloomberg Live event earlier this month. “These are things that will persist and continue to add value over time.”
Spending Plan to Boost GDP
One particularly encouraging development, according to JPMorgan Chase & Co. chief U.S. economist Michael Feroli: Companies have ramped up capital investment. After plunging in the second quarter of last year as the economy came to a virtual standstill, business spending on equipment surged at a 25.4% pace in the fourth quarter, building on a 68.2% resurgence in the previous three months that followed five straight quarterly contractions.
In a 108-page report released last month, global consultants McKinsey & Co. saw the potential for a 1 percentage-point acceleration in annual productivity growth over the next four years — roughly doubling the average increase seen in the expansion that followed the global financial crisis.
Biden’s rescue plan helped generate the strong demand that McKinsey says is needed to convince companies to spend more on their operations and their workers.
What Bloomberg Economics Says…
Key to success will be overcoming hurdles to productivity growth that the private sector was incapable of or unwilling to address.
–Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger. For full analysis, click here.
The president’s proposal to substantially increase outlays on public infrastructure such as roads, bridges and broadband should also help make the economy more productive, although the effect will likely be small. Bloomberg Economics analysis suggested the potential to lift long-term growth prospects by about 0.1%, with 2.2 million in employment generated during the investment period.
The American Families Plan, set to be unveiled next week, will likewise probably have a small, but positive, impact on the economy’s long-term potential growth rate, on the order of about 0.1 percentage point a year, according to Moody’s Analytics chief economist Mark Zandi.
Not everyone is upbeat about America’s long-term economic prospects. In projections last month, Fed policy makers pegged the economy’s potential growth rate at 1.8%, according to their median forecast. Bond market investors seemingly also remain skeptical: They continue to buy Treasury securities at yields well below the rate of inflation.
Even so, former Fed official Daniel Sichel said he’s guardedly optimistic. The economics professor at Wellesley College sees the economy’s cruising speed rising to as fast as 2.25% per year, thanks to innovations and changes in work practices made before and during the pandemic.
“The infrastructure package is really well timed” to contribute to that, said Sichel.
— With assistance by Carol A Massar