how can the us economy grow? - center for real estate · leveraging science, developing innovation...

LEVERAGING SCIENCE, DEVELOPING INNOVATION

How Can The USEconomy Grow?

Headwinds and Tailwinds

William WheatonDepartment of Economics, Center for Real Estate, MIT

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Short term growth Issues: The Prospects for consumption?

1). Consuming (rather than saving) gives a short run boost to economic growth (a tailwind). However growth in consumption is not a permanent effect.

Emerging Markets have savings rates that are so high that even a modest reduction increases the consumption rate sufficiently for a sustained contribution to their GDP growth. How to encourage the EM into higher consumption rates?

The US savings rate is already so close to zero that further reduction in the saving rate (increases in the consumption rate) are limited. A housing recovery on the other hand could help in several respects.

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High Savings rates in Developing Worldprovide huge potential for increasedconsumption

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US consumption will be hard pressed to Exceed Income growth?

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Some increase in the US consumptionrate could occur with a recoveryin Housing and the restoration ofhousehold balance sheets

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But a Housing recovery will generatemuch construction andadd to growth thru output.

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change in housing starts, % residential investment contribution to GDP growth, %

Change in housing starts, % Residential investment contribution to GDP growth, %

Housing starts increasefrom 609 ths in 2011to 1,400 ths in 2016

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Short term growth Issues: Dangerous deficits2). Government deficits (borrowing from the future with the issuance of debt) will increase current consumption, but it also is not sustainable. Deficit reductions then induce temporary contractions. Fiscal debt is (a headwind)

IMF: Growth in Debt/GDP = deficit/GDP - GDP growth rate

Japan: 8% = 9% - 1% hence: 2012 Debt/GDP = 2.15 x 1.08 US: 6% = 9% - 3% hence: 2012 Debt/GDP = .98 x 1.06

As Debt/GDP ratio rises, more GDP must be used to pay for debt interest, less available for savings/investment, slower GDP growth, Debt/GDP increases further…

Crisis: Sovereign default, call the IMF, ….

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Keynes’ View of DeficitsGood years: balanced budget, Debt/GDP declines with the growth rate in GDP (e.g. 3% yearly, 35% per decade)

Recession/Crisis years: run deficits of 5-10% to help restore growth (do so for say 3 years, Debt/GDP rises 15 – 30% during each Crisis).

Over time Debt/GDP stable or declining, countries are always borrowing (a bit) from the future to fight crisis, smooth their economies UNLESS

a). You do not balance the budget in good years. b). Crisis become more common (10 year average) c). GDP grows more slowly structurally. d). Your initial D/GDP is (too) high (e.g. >1)

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Deficit Reductions:Impact of TaxesRaising taxes leads to a large negative “Keynesian” shock to output demand as money is siphoned from the private sector to pay off government debt.

In addition high tax rates can lower longer term incentives for individuals to work/save, and for corporations to invest = reduced productivity and slower GDP growth.

“Bad” Taxes: Taxes that discourage work effort Taxes discouraging investment/savings Tax expenditures (same as subsidies)

“Good” Taxes : Consumption tax (encourages savings) Carbon tax (saves the climate) Gasoline taxes (congestion, pollution reductions) Estate taxes (silver spoons discourage savings, effort)

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Deficit Reductions:Impact of Expenditures Public spending cuts: lead to an equally large negative

“Keynesian” shock to output demand. Transfers are just another form of consumption.

In addition to being consumption, some government expenditure has longer term positive productivity effects: schooling, infrastructure, R+D…

Without discipline, some public expenditures have zero or negative productivity effects: bridge to nowhere…

BALANCED Policy Making: how does lost productivity from higher tax disincentives compare to that from lower public expenditure?

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Longer Term Growth Issues: Aging 3). Workers generate GDP, retirees receive some form of transfer from them. Few developed countries have self sufficient individual savings.

More workers less retirees = higher GDP per capita.

More retirees less workers = lower GDP per capita.

Hence Aging (increase in retirees/workers) is a big drag and will reduce economic growth (headwind).

Even emerging markets have future increases in their “Dependency Ratio” from population’s aging..

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“Dependency” Increasing Everywhere:US not as bad as many countries

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Old‐age dependency ratios: Number of people aged 65 + as % of working‐age population (age 15‐64)

Source: European Commission

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Immigration can help offsetLabor Force Declines From aging:“Rational” Immigration reform

Contribution of international migration to growth in the labor force, 2000-10

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Longer Term Growth Issues: Continued Global Trade Expansion

4). International trade, “Openness” has greatly expanded over the last 2 decades. Increases in country specialization and trade will always generate higher global GDP (tailwind).

Theory of “comparative advantage”

Gains from trade not always balanced or evenly distributed between trading partners

Time for Emerging Markets to re‐align currency, and begin importing from Developed Countries.

What to do about export imbalances within the EU?

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The US Economy Opens up anddiscovers “Trade”

Exports, Imports, as % of GDP

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A Weak Dollar has,will continue to Help US Trade

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Exchange Rate, Major Currency Index Real Trade Gap

Exchange Rate, Index (March 1973=100) Real Trade Gap, Bil. $2005

Source: Bureau of Economic Analysis; Federal Reserve.

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LEVERAGING SCIENCE, DEVELOPING INNOVATION17

US becomes anenergy-based exporter?

US Natural gas prices are 35% of those in mainlandEU and Japan.

There is a significant prospect of the US being able to export LNG. US LNG export prices today are 40-50% of German and Japanese import prices.

Certain types of manufacturing intrinsically use Natural gas in their manufacturing (bulk chemicals). The US now has a huge comparative advantage in these.

Other types of manufacturing that are energy intensive (aluminum) will find their costs reduced as they either switch to Gas or use gas-generated electricity. More comparative advantage.


Longer Term Growth Issues:Global Warming 5). Adjusting to global warming will require increasingly large investments that absorb GDP without generating increases in our standard of living. Building dikes rather than houses, doing with less because more of GDP is spent trying to stem the floods, keep cool… (headwind).

Rising Oceans, more volatile weather, lower crop yields can be mitigated – but only by devoting GDP to maintaining the status quo in living standards.


Where the US is likely towarm the most: a 60 year Outlook

Climatewizard.org. ESRI, Dark red +10, yellow +2:


Where US Precipitation is likely toincrease the most: a 60 year Outlook


Longer Term Growth Issues:Is there a new Industrial Revolution? 6). Robert Gordon: major long term variation in productivity (GDP) growth is due mainly to “Industrial Revolutions”. Can the IT revolution and science wind up saving us (tailwind) ?

IR#1: 1780-1840: Steam, coal, . Short and quick, productivitygrowth increases to 0.8% from almost zero.

IR#2: 1870-1970: electricity, clean water, oil-IC engine, radio,health: 2.4% sustained productivity growth for a century(16x increase in std. of living)

IR#3: 1970-current: computers, information age, internet.

1970-1995: productivity growth 1.5% (Why?) 1995-2004: productivity growth 2.5% (Wow!) 2005-2012: productivity growth 1.3% (Ugh)


The current ITIndustrial RevolutionIs the IT productivity boom (IR #3) really petering out?

YES Most recent IT revolution not really productivity enhancing and just

a form of consumption IPODs, social networking, streaming video, connectivity have a big

“consumption” component.

?? US changing patent protection: “first to invent” (encourage ex post

court claims) to “first to file” (rest of the world). “First to file” favors larger corporations, big patents

NO Enormous revolution in logistics has been productivity enhancing

with a huge boom to trade. Coming revolution in shopping frees up time/travel Robotics is not over: 3D “direct” production.


Current Industrial Revolution(continued)

AND IT is enabling new Scientific and Technological innovations that have potential for future Industrial Revolutions (IR#4+…)

The Cloud and new mainframes are boosting corporate and scientific data storage and allowing parallel computing upon “Big Data” bases….

Quantum computing (if realized) is light years faster than digital computing. A range of fundamental scientific questions could be answered which currently are beyond our reach

The growing Medical sector has been late to adopt IT and this has enormous potential productivity gains.

Materials (Nano) technology about to become practical, Carbon (CO2 sequestering) replaces steel, aluminum, copper (CO2 producing)...

THE BEST HOPE FOR GROWTH

William Wheaton

William Wheaton is a professor at the Massachusetts Institute of Technology (MIT) in the Economics Department as well as the Department of Urban Studies and Planning and was previously Director of the Center for Real Estate at MIT. The first economist to apply economic methods to the forecasting of commercial real estate markets, Dr. Wheaton’s innovative perspective and integrated econometric modeling have provided a framework for decision making that more traditional analyses cannot achieve. Dr. Wheaton attended Princeton University for his undergraduate degree and received his Ph.D. in Economics from the University of Pennsylvania. Dr. Wheaton has authored many academic research reports and journal articles. He also co‐authored the highly acclaimed textbook Urban Economics and Real Estate Markets, hailed as ground breaking in the real estate economics field.

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