US living standards in jeopardy

By Jim Jubak

After he takes the oath of office Jan. 20, Barack Obama will face huge tasks. Just look at some of the challenges in the headlines now:

• Ending the recession.

• Saving Detroit.

• Rescuing the banking system.

• Saving Wall Street from itself.

• Stopping the tidal wave of mortgage foreclosures.

• Putting the unemployed back to work.

And that list doesn't include the biggest economic challenge facing the new president: The United States and other developed economies of the world have to find a formula that will deliver faster real economic growth when the good times return.

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The Congressional Budget Office recently projected (see my Jan. 13 column, "5 stocks for even-gloomier times") that when the U.S. economy finally hits full stride again in 2015, we'll be looking at just 2.3% annual growth. We must find a way to increase what economists call the growth "speed limit" for the U.S. economy. The growth speed limit is the maximum real -- i.e., after subtracting inflation -- growth rate for an economy that doesn't let loose the dogs of inflation. A U.S. boom that produces just 2.3% growth will leave too many in the United States staring at the very unpleasant prospect of falling living standards.

Dangerous at low speed

How big a problem is a low speed limit? Huge when you're looking at an economy as big as ours. At 2.3% growth, the $14.4 trillion U.S. economy (as of the third quarter of 2008) would produce an increase in economic activity of $331 billion in a year. That activity would generate money we could use to pay off the debt we've run up to end the current crisis, to buy better education and health care, to protect the environment, to improve our living standards, to spend and, for a few, to save.

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Not too long ago, when productivity growth was booming, the Federal Reserve calculated that the economic speed limit might be as high as 3%. At a 3% limit, that one-year increase in economic activity comes to $432 billion -- an extra $100 billion in a year. Does anybody doubt that addition to our national income stream would come in handy right now?

And the difference would get larger each year as the two rates were compounded. After 10 years at 2.3% growth, the U.S. economy would grow from $14.4 trillion in the third quarter of 2008 to $18.1 trillion, after accounting for inflation. At 3%, however, the U.S. economy would reach $19.4 trillion in gross domestic product. That's an additional $1.3 trillion in national economic activity from the higher growth speed limit.

Lacking a definite plan

No one ran for the presidency last year -- and that includes the victorious candidate -- with a concrete plan for increasing the growth speed limit of the U.S. economy. That's understandable. When your house is on fire, you aren't going to sit down and prepare a 10-year plan for minimizing the damage from future fires. You've got more pressing problems.

Those immediate problems -- and the expensive solutions that the experts have come up with to fix them -- make it even more important to raise the long-term economic speed limit for the U.S. as high as possible.

If we're to have any hope of paying for these solutions without leaving our children and their children impoverished, the economy has got to grow faster than is projected. Otherwise, too much of the cost of the current crisis will have to come out of the hide of future generations in the form of lower living standards. Nobody wants to leave that to their children.

'Sweat the details'

But when it comes to fixing the developed world's No. 1 long-run problem, there's no magic bullet. Nobody really has a convincing theory to explain what sets the speed limit for an economy in the first place -- and then what causes it to fluctuate -- so coming up with a moon-shot solution is extremely unlikely. To solve the speed-limit problem, it looks like we're going to have to do a lot of relatively little things right. An old adage, "Sweat the details, and the big picture will take care of itself," may be the best guide we have to pushing up the speed limit.

For example, the United States spends less on worker retraining than just about any of the world's other developed economies. And in its relative neglect of part-time workers, the retraining that is available has fallen badly behind the times. In the current economy, more and more workers are permanently part time as they care for children or aging parents.

The official unemployment rate hit 7.2% in December. Factor in part-time workers who would like to work full time and discouraged people who have stopped looking for work, and the real rate is more like 13.5%.

Some of those people won't go back to work even when this recession is over because the relatively meager safety net supporting the unemployed in the United States will have given way beneath them. They will have suffered so much personal and family damage that they will never regain their full pre-recession productivity.

Continued: Breaking up the bottlenecks

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