Long-Term Trends 1.

The United States faces one long-term problem in how to support its existing entitlement programs (Social Security, Medicare/Medicaid) and other discretionary spending as the “Baby Boom” takes up the rocking chair. A growing economy will more easily support these programs without drastic tax increases or spending cuts. A second long-term problem is that the national debt accumulated by many years of deficit spending has reached 75 percent of Gross Domestic Product (GDP) and is primed to go higher. This alarms some people more than other people.

President Obama is committed to stabilizing the national debt as a share of GDP at around 73 percent of GDP between now and 2025. This will a lot easier with a growing economy than with a lame one. So, how to foster growth?

As the US economy emerges from the “Great Recession” its long-term future will be determined in part by the absolute number of workers employed and the productivity-per-worker.[1] According to some measures, the US economy is in trouble in these areas.

The “labor participation rate” (the share of the population in work or looking for work) However, between 1950 and 2000, the participation of men in the labor force fell from almost 90 percent to about 70 percent. Over the same period, women’s participation rose from about 30 percent to about 60 percent. Then over-all rate fell from 66 percent (2007) to 62.9 percent (2014). The conventional explanation is that the prolonged recession dumped people into despair. Still, it is worth considering a couple of other possible factors. For one thing, the recession also coincided with the early stages of the “baby boom” taking retirement. If so, then there is a limited chance of luring them back into the labor force. The Congressional Budget Office (CBO) projects a 62.0 percent participation rate by 2019. For another thing, the decline may reflect a cultural preference for parents to spend more time with young children in the absence of compelling incentives to try to work.

The Obama administration has proposed ways to get as much participation as possible out of the labor force that remains.[2] Increasing the labor force is one element of this strategy. The Obama administration has proposed increasing immigration in order to expand the labor force and offering expanded maternity leave in order to keep women in the labor force. Other measures would include a $500 tax “credit” for working couples. This could be used to off-set child-care and commuting costs. Perhaps that will lure stay-at-home Moms and Dads into the labor force. A separate proposal increases the child-care tax credit. A third measure would offer the Earned Income Tax Credit to workers without children. This proposal tries to draw more single men into the job market.

Increasing productivity is more of a problem. Productivity increased by about 1.3 percent/year from 1973 to 1981; by about 1.7 percent/year between 1981 and 1990; by about 2.1 percent/year between 1990 and 2000; and by about 2.7 percent/year between 2001 and 2007. Productivity gains had already begun to slow by 2004, even before the “Great Recession.” Since 2007, productivity has increased on an average of 1.3 percent per year.[3]

A bunch of these proposals have also been advanced in the past by Republicans like Rob Portman and Paul Ryan. (See: “RomneyCare.”) It will be interesting to see if the Republicans know how to take “Yes” for an answer.

[1] Greg Ip, “Economy’s Supply Side Sputters,” WSJ, 19 February 2015.

[2] Nick Timiraos, “Obama Sees 20 Rocky Years as Boomers Retire,” WSJ, 20 February 2015.

[3] There is an obvious problem with how Greg Ip slices up the periods. A full–decade average for 2001 to 2010 would both reduce the gains from 2001 to 2007 and would increase the numbers for 2007-2010.

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