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Economy

Why Isn’t America Becoming “Great Again?”

Aug 22 , 2017
  • Yu Xiang

    Research Fellow, China Institutes of Contemporary International Relations

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Copies of U.S. President Donald Trump administration's first budget blueprint are seen in Washington D.C., the United States, on March 16, 2017. U.S. President Donald Trump on Thursday unveiled the administration's first budget blueprint which seeks deep cuts across federal departments and agencies in order to fund rising defense spending. (Xinhua/Yin Bogu)

In his presidential campaign, Trump's promise to "Make America Great Again" moved many Americans. He claimed to have "unique" ways to realize those promises and reach a very ambitious GDP growth goal (4%), but has never clarified what his plans are.

Whatever his plans, since productivity is the main driver of a country’s economy, if Trump is serious about his promise, he has to find a way to reverse slowing US productivity growth.

Productivity measures the quantity of goods and services produced for each unit of work time. At present, Trump faces dreary productivity growth and a deceleration of growth in the labor force. US productivity is forecasted to rise by 1% in 2017, an improvement on the 0.5% recorded for 2016 but far shy of the 2.9% growth seen from 1999 to 2006, according to Conference Board projections. The average of annual rates from the five years leading up to 2016, a kind of rolling method statisticians consider to be the most accurate indication of an underlying trend, was only 0.4%. This has provoked anxiety at the Federal Reserve, with Fed Chair Janet Yellen describing the data as "puzzling" and "disappointing." Yellen has repeatedly suggested that any new economic policies should be aimed at boosting productivity growth.

If this distressingly slow productivity growth persists the US will continue to be in the "swamp" of below-trend growth, with all the related problems: rising debt, falling living standards, and high unemployment.

Several explanations have emerged for this slowing growth.

The first explanation is that the current statistical methods can't capture the fruits of social and economic development. Some pundits claim that last decade's credit bubble distorted the data: It artificially inflated the value of financial services, making today's economy look smaller by comparison. Charlie Bean, a former deputy governor of the Bank of England, said statisticians could be failing to count all of the productive activity in cyberspace because keeping track of it is so difficult. In a similar vein, they might not be measuring the entire output of free services, like apps. Silicon Valley is turning out new apps to make peoples’ lives easier, but very little of this activity shows up in productivity statistics.

The second explanation is that America suffers from a multi-speed economy. Some argue that certain companies, such as Silicon Valley locomotives like Google and forward-thinking, competitive manufacturers like GE, are becoming more productive. These companies are the ones which tend to grab public attention. But the rest are dragging down the productivity growth rate. Instead of being encouraged, productive and fast-growing startups are facing more market access barriers. The number of startups is not up, but down.

The third explanation is that there is a major gap occurring between the cup and the lip. The rapid pace of innovation is real, but the changes are not translating into more efficient factories and offices. One reason for this could be a lack of investment in business and human capital. The Great Recession certainly put a damper on all forms of investment and the recovery has been sluggish.

The fourth explanation is that America’s population is aging, reducing the dynamism of the economy. Trump’s immigration policies have only exacerbated this problem. He recently announced plans for new immigration laws, which will cut the number of immigrants admitted to the US by half over a decade. Lots of research shows that immigrants drive up economic growth and boost productivity in advanced economies. A 2016 IMF report found that a 1% increase in migrant population creates an extra 2% GDP per capita in the long term. Instead of being replenished by youthful immigrants, the American workforce is becoming increasingly insular.

Whilst Trump has spoken a lot about “making America great again,” his actions while in office have done little to make this pledge a reality.

Trump's proposed budget for fiscal year 2018 calls for a 13.5% spending cut to education across K-12 and higher education, including eliminating the Public Service Loan Forgiveness program, shrinking aiding program "provides part-time jobs for undergraduate and graduate students" If so, it would be the lowest level of funding the program has ever received since the Department of Education began to administer it in 1980.

Not only that, Trump's 2018 budget request seeks huge cuts to science and medical research, including a $561 million decrease over previously enacted levels for NASA, reducing the number of earth science missions, eliminate the agency's education office.

The answers and policy advice to solve above problems include: reform the traditional statistics methods, letting the data include all innovations; provide more financial aid to technology innovation; cut tax rate, simplify US tax system to boost investment; use government procurement as a tool to help startups, provide more training services for the aging firms and aging workers; practice more good industries guidance measures to stimulate new business formations, which tend to have higher productivity; open more domestic market to the world to let more productive firms and labor force enter the US. Although there would be winners and losers, these competitive occurrences are good for US productivity improvement and sustainable development.

Trump published his first six months' achievements sheet on July 20. His intention is to boast he has done a lot for Americans. But in it, we couldn't find out the direct and effective ways to boost productivity growth. The tax reform and infrastructure construction, which would be helpful to boost productivity growth and should have been passed by now, are postponed.

Trump gave his 2018 fiscal year budget a very beautiful title "A New Foundation for American Greatness", but his policies and actions are actually drifting away from the track of assuring the US greatness.

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