Cheating The Future

Milton Ezrati

Chief Economist

The U.S. economy has behaved well during the past couple of years.  Growth has accelerated nicely from the anemic pace that prevailed for much of the period from 2010 through 2016. Real gross domestic product (GDP) during that time expanded at less than 2 percent a year on average and employment expanded by a mere 175,000 jobs a month. Since, real GDP has grown at almost a 3 percent yearly pace, while the economy on average has produced 238,000 new jobs a month. Little at the moment presents an immediate threat to growth.  Longer-term, however, concerns multiply. In particular, American business and industry seem reluctant to invest in new facilities, equipment, and intellectual capital. This behavior threatens future prosperity on a most fundamental level, including the outlook for increases in labor productivity and hence wages.

This reluctance to expand production facilities was clearly evident during the slow growth years earlier in this recovery.  Between 2010 and 2016, real spending on new equipment and premises as well as technology grew at only 3.6 percent a year. That was certainly faster than the anemic increases in overall real GDP, but typically such spending surges in recoveries to catch up for the equally sharp cutbacks faced in recession. This last cycle saw the recessionary cutbacks but not the capital spending surge in the recovery. Spending on structures grew on average a paltry 2 percent a year on average, perhaps in reflection of the over-investment in real estate during the time leading to the 2008-09 great recession.  This particular circumstance cannot, however, explain the only 3.7 percent yearly rate of advance in real spending on equipment or, more significantly, the only 4.8 percent annual growth in spending on what the Commerce Department refers to as “intellectual property products.”  This area, mostly technology, had frequently exhibited double-digit rates of growth prior to this time.  Seldom during this whole six-year period did new overall spending exceed depreciation by more than 30 percent. Past recoveries often saw rates of capital spending exceed depreciation by as much as 50 percent.

Reasonable speculation ascribes this paucity of spending to three factors: First up is the shock of the 2008-09 financial crisis and the great recession. So many people made so many bad decisions in the run-up to that debacle and as a consequence lost so much money that business managers understandably had a reluctance to pursue any new project as aggressively as they might have in the past. There was also the anti-business tone emanating from Washington at the time. Even in the absence of explicit threats, business decision makers worried that government policy would tax away or otherwise impede the gains that might accrue to new investments.  The third was the flood of extensive new regulations coming out of Washington. These not only increased the costs of doing business and consequently restrained any urge to expand or upgrade, but they also left managers uncertain about future directions.

By 2017, those restraints seemed to lift.  Memories of 2008-09 pain had dissipated, and the new administration had begun to remove some of the most costly regulations, as well as implement pro-business tax reform. Capital spending by business gathered momentum.  In the first quarter of 2017, such spending overall jumped abruptly at a 9.6 percent annual rate in real terms, a big change from no growth in the fourth quarter of the previous year. And it continued at near that heightened pace well into 2018.  Over 2017 and the first half of 2018, all sorts of capital spending by business rose at an 8 percent yearly rate, far faster than previously. New real spending on equipment rose at a smart 8.6 percent yearly rate, and spending on intellectual property returned to its older rapid growth trajectory, turning in an average 11.7 percent yearly rate of advance.

But of late, a more timid, less desirable pattern seems to have re-asserted itself. The third quarter of 2018 saw only a 2.5 percent rate of expansion in overall capital spending. The pace picked up in the fourth quarter. Growing at an annual rate of 6.2 percent, but orders for new capital goods told a different story. For the September-to-January period, they showed a slight outright decline, while this figure absent ever-volatile aircraft orders showed a drop of almost 5.0 percent at an annual rate. The change could simply reflect a reaction to the earlier surge, but it might signal a worrisome return to the anemic spending pace of earlier years.

Nor do the available data necessarily support the popular official and unofficial claims that college is a best route to a rewarding career. The typical comparison touting college points out that an average college graduate will command an annual salary of about $58,000, while those with only a high school degree will command $34,000. But the picture changes if the calculations include an adjustment for the academic standing of those involved. The bottom half of college graduates command annual salaries of only between $28,000 and 58,000, where the top half those with only a high school diploma command annual salaries of between $34,000 and 70,000. The averages favor college, but they hide how a talented worker can do well despite the lack of college. To be sure, talent with college can go still further, but only if the college track suits the individual in question.

None can doubt that some careers demand the fruits of a good college education and more. But many jobs that otherwise require skill and intelligence and that pay well do not. Employers have insisted on college for many jobs that really do not require it because they do not trust the quality of a high school diploma and, in the absence of a vocational track, have no other basis to judge. The nation could serve its economy, its employers, and its workers by offering an effective vocational alternative and reallocating some of the college-linked largess to other sorts of training.

More from our Chief Economist: 
As another government shutdown looms, markets remain steady
Consumers will regain their mojo later in the year
AOC and Krugman can’t justify their 70% solution


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