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Decline in U.S. Seen Without More Immigration: Cutting Research

August 31, 2012

Decline In U.S. Seen Without More Immigration: Cutting Research

Worker Francisco Roeda Puebla picks flue-cured tobacco leaves during the harvest on land leased by Eaton Farms in Kernersville, North Carolina, on Aug. 8, 2012. Photographer: Davis Turner/Bloomberg

The U.S.’s best 250 years are behind it, Northwestern University professor Robert Gordon writes in a paper published by the National Bureau of Economic Research, saying economic growth may gradually “sputter out.”

Gordon outlines how there was virtually no expansion before 1750 -- before the American Revolution led to the creation of the U.S. The entire period since then “could well turn out to be a unique episode in human history,” he wrote in the paper published this week.

That questions the “nearly universal” view promoted by Nobel Laureate Robert Solow and others since the 1950s that “economic growth is a continuous process that will persist forever,” said Gordon, who is based in Evanston, Illinois, and turns 72 next week.

The Stanley G. Harris Professor in the Social Sciences at Northwestern and a member or senior adviser of the Brookings Institution’s Panel on Economy for 37 years, Gordon sits on the NBER committee that determines when recessions begin and end.

With the U.S. economy set to run into six “headwinds,” Gordon estimates future growth in gross domestic product per capita could slow to 0.2 percent by 2100 from 2 percent over the past 150 years. It was as high as 2.5 percent in the middle of the 20th century.

Gordon says the past two-and-a-half centuries can be divided into three industrial revolutions. Together they explain the growth spurt that produced the world’s biggest economy.

The first period lasted until 1830 and featured the creation of steam engines and cotton spinning. From 1870 through 1900 came the harnessing of electricity, running water and the invention of the internal combustion engine. The computer and Internet revolutions then began around 1970.

While innovation will still support standards of living, Gordon identified the obstacles to increasing prosperity as demographics, rising inequality, globalization, more expensive education and poorer performance in secondary schooling, environmental regulations and taxes. One way to soften the blow is for the U.S. to embrace unlimited immigration of high-skilled workers, Gordon wrote.

* * *

Central bankers meeting in Jackson Hole, Wyoming, today may be facing renewed tightness in monetary conditions.

That’s the warning of Gustavo Reis, an economist at Bank of America Merrill Lynch in New York. Some monetary and credit measures point to a “tighter” environment for monetary policy, he said in an Aug. 24 report.

The so-called global money gap, which measures money supply as a share of GDP, has turned negative, meaning less money is available to fuel economic activity, Reis wrote. European Central Bank economists have previously found the indicator can provide insight into future activity, he said.

A similar result occurs if credit is monitored as a percentage of GDP. That ratio is dipping below zero, said Reis, who noted the Bank for International Settlements in Basel, Switzerland, found it an insightful guide to the financial cycle. The result is “the world’s largest central banks look poised to deliver significant policy easing in the months ahead,” he said. “It may look like damage control, as the global economy should remain subdued into year-end.”

Still, the Taylor Rule, devised for guiding monetary policy by Stanford University professor John Taylor, suggests global money policy will remain accommodative even though it’s not as loose as earlier in the year, Reis said. The rule implies the global policy rate should be about 6 percent compared with the actual rate of about 2 percent.

* * *

ECB President Mario Draghi, who this week canceled his planned trip to Jackson Hole for scheduling reasons, may be overseeing the transition of the euro area into a monetary union akin to his own Italy in the 1970s and 1990s, according to Commerzbank AG.

Easy monetary policy, accelerating inflation and a soft currency may become the hallmarks of the region, stabilizing its economy and obscuring the structural weaknesses of the peripheral countries, said Chief Economist Joerg Kraemer and colleagues Ralph Solveen and Bernd Meyer in two recent reports.

The ECB’s purchases of bonds will help reduce the risk of the euro area disintegrating and ease competitive pressure on economies such as Greece’s by fueling wage growth in the core economies and pushing down the euro.

This “Italian monetary union” would work for an extended period of time, Commerzbank said. That would support risky assets such as equities and corporate debt into 2014 as investors unwind bets on the euro breaking up and investment grows as uncertainty diminishes. High-quality government bonds would probably suffer.

While such a transition could last for a decade, the longer-term risk would be rising inflation, weak growth and higher unemployment, the reports said. Economies including those in the core, such as Germany’s, would overheat. It took a decade for Spain’s property bubble to burst, the economists noted.

* * *

On the other hand, the euro area could emerge from its crisis as a “much more competitive and dynamic player than before.”

So says London-based Berenberg Bank economist Christian Schulz, who wrote in an Aug. 23 report that exports are the “ultimate yardstick” of competitiveness. By that measure, recent data suggest the euro region (EUGNEMUQ:US) is succeeding in global markets, he said.

Its trade surplus now stands at about 40 billion euros ($50.1 billion) over 12 months, the best since 2005, Schulz estimates.

Lower euro and commodity prices may have strengthened the trade balance alongside reduced demand for imports in crisis countries. Weaker domestic buying hurts local producers, forcing them to seek customers in healthier economies, Schulz said.

“By tackling imbalances, the euro zone is gaining competitiveness vis-a-vis its developed world peers -- the U.S., Japan and the U.K.” Those so far have avoided serious rebalancing, he said.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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