I’ll See Your Two, and Raise You One

Writers Note: I hesitated to write this epistle because I feared some would choose to interpret it through their own political prism. Please don’t. I subscribe to no political agenda in writing this piece. That is not my purpose. This is an article written to be viewed through the kaleidoscope of economics, and economics only. Westover is entrusted with the financial assets and well-being of many clients. It is for the purpose of better safeguarding and growing your assets that I write this article. I respectfully ask that you read it in that light.

   – Murray Sawyer

Gross domestic product or GDP is the best way to measure the health of a country’s economy. It measures the total dollar value of all goods and services within a country’s borders produced over a specific period of time.

This past spring we featured an economist at our annual Westover Spring Summit. That speaker, Joel Naroff, opined that the United States was stuck in an economic rut, where annual GDP growth would not exceed 2% for the foreseeable future. The last eight years of the previous administration had seen yearly GDP growth at 1.47%. Naroff’s thesis was that going forward a 1.5%-2% rate of economic growth will be our country’s “New Normal.”

I beg to differ.

This week voices from both the left and the right have also taken exception to the Naroff Narrative. First, former United States Senator Phil Gramm (R-Texas), who is also an economist by trade, argued in an opinion piece in the Wall Street Journal that growth at 3% is not only possible but our historic birthright. He pointed out that plus 3% GDP growth on average had been historically achieved for over 150 years…until the start of 2009 and the policies put in place by the administration in power at that time.

Then, just two days later on September 13th, Jamie Dimon the CEO of JP Morgan Chase and a Democrat, declared at the Delivering Alpha conference “If we did things right, we’d be growing at 3%.”

So what’s it to be? 2% or 3%?

Here are some facts and arguments. What do you think?

I’ll See You Two

First, The Naroff Narrative: GDP is a function of two things – labor and productivity. As to the first, the demographic changes in the United States show that our population is aging relative to its historic norms with a very large bubble of Baby Boomers who are just starting to leave and who will continue to exit the workforce for years to come. That loss of aged workers will be larger than we have ever experienced before. In addition, the traditional influx of immigrants has been and will continue to be reduced through Trump immigration policies. Finally our country’s declining birth rate is an historical anomaly but nevertheless a trend that does not seem likely to abate, particularly if immigration is restricted. The combination of those three labor observations will have a deleterious effect on labor force participation in the future.

As to the productivity component, Dr. Naroff is of the view that technology has effectively reduced the ability of our labor force to be anything but marginally productive going forward. Hence his prediction that our GDP would continue to fall in the 1.5 to 2% range for the foreseeable future.

Naroff is not alone in taking this view. Six months ago the Congressional Budget Office (CBO) slashed its 10-year growth forecast for the United States to 1.8% per year. But remember, this is the same CBO that predicted 10-year GDP growth at 3% in 2009, as did the Federal Reserve. With the benefit of hindsight we now know how those predictions fared.
From a Where-is-America-Going–in-Our-Next-Generation perspective, 3% growth rather than 1.8%, is critical to the concept of American Exceptionalism. In the famous words of John Winthrop, the Puritan preacher who uttered those words onboard the Arabella headed to the Massachusetts Bay Colony in 1630, will we still be that “City on the Hill”a generation from now?

Both JFK and Ronald Reagan returned to that question and that phrase during their administrations when facing great national challenges. I, for one, think we face an equal challenge today. How we set Washington policies to resolve that GDP debate will set the table for the economic success or failure of our next generation.

I’ll Raise You One

Next, the Gramm Rejoinder. Gramm received a PhD in economics from the University of Georgia and taught economics at Texas A&M University for 11 years before entering the political arena. So he carries genuine bona fides as an academic economist.

He started his political life as a Democrat, serving in Congress in 1978. But, like Ronald Reagan, he switched parties joining the Republican Party before becoming a U.S. Senator in 1984. To some on the left he is viewed as a partisan and, as such, they say his ideas should be dismissed. I understand that point of view when he speaks from a political point of view, but disagree with it when considering his economic observations. I am of the mind that even those with whom we may disagree should be heard, their ideas fairly considered. And the truth thereof acknowledged when we are persuaded.
Gramm notes that 3% annual growth is akin to our “national birthright”. He points out that our country’s real growth averaged 4.2% from 1820-1889. It averaged 3.7% from 1890 to 1948 and came in at 3.4% from a 1948 to 2008. That’s through periods including the Civil War, World Wars I and II, the Great Depression, Vietnam, and 39 recessionary times. Do the math. For 187 years the United States GDP growth rate averaged 3.79% annually. By comparison, from 2008 to 2016 GDP averaged a measly 1.47%.

Gramm ascribes the change to several government policies occurring simultaneously which affected both labor and productivity.

First, he looks to an explosion in rules and regulations across many sectors, including healthcare, energy, manufacturing and financial services. Companies were forced to spend billions of dollars on new capital and labor which served the government but which did not serve consumers. “Banks hired compliance officers rather than loan officers. Energy companies spent billions on environmental compliance costs and none of it produced energy more cheaply or abundantly. Health insurance premiums skyrocketed but with no additional benefit to the vast majority of covered workers.” The sum total of these policies severely constricted worker productivity.

Speaking personally, Westover’s federally mandated compliance regulations now cause us to spend 10 times what we spent ten years ago. And no economic benefit has befallen either our clients or ourselves in return for that regulatory overkill.

Second, he addresses the Naroff reduced labor force argument. Dr. Gramm acknowledges the significance of an aging American population. He points out that labor force participation rates were 66.2% in 2006 and that the Bureau of Labor Statistics predicted that Baby Boomer demographic changes would push it down to 65.5% by 2016. However, under the policies extant from 2009-2016, labor force participation actually felt significantly further, to 62.8%. The number of working- ge Americans who were not in the labor market spiked to 55 million during those years.

As to the low birth rate observation, he replies that if the current population above age 16 were to grow at a modest 1%, a reversion to the 2006 labor force participation rates (66.2%) rather than 2016 rates (62.8%) would supply more than enough workers to generate 3% GDP growth for years to come. “With 3 percent growth, the American dream is achievable and virtually anybody willing to work hard can live it”. But “let 3 percent die and a lot of what we love most about our country will die with it.”

Finally, on the labor question, this is his observation. He points out that during the period (2009-2016) that work requirements for welfare were eliminated or reduced, that food stamp eligibility requirements were lowered and that standards for receiving disability payments were eased. Disability rolls expanded 18.6%. The end result of those policies “disincentivized work.” Work. That’s the operative word. It’s the necessary ingredient, the sine qua non, to creating a country’s healthy GDP.

This debate is what I refer to as the “heart versus head” tension in the American body politic. When the head ascends, GDP goes up; and when the heart ascends, GDP goes down. We need policies which bring us a combination of both, not just one or the other.

And I’ll Also Raise You One

And what is Jamie Dimon’s view? The Delivering Alpha conference held in New York City is an incomparable who’s who of the investor community. Hedge fund honchos, private equity giants and leading institutional investors offer their candid views along with illustrious political and economic commentators. In my profession it’s a big deal. This is the group Jamie Dimon was speaking to yesterday. He ripped the current state of the US economy, and said that growth had been constrained by years of inaction in Washington.

He noted that congressional gridlock and excessive regulation, coupled with the absence of tax reform, has led us to our current state of lethargic growth. “There’s something wrong. All I’ve ever said is if we did things right, we would be growing at 3%.”
Dimon’s prescription for a strong growth path is slightly different and broader than the Gramm agenda, but nevertheless is solid. He calls for changes to immigration, education and labor force laws in addition to tax and regulatory reform. As to the latter he made my day by saying “Hey, ask any small business, any of you in this audience, what have regulations ever done? They are crippling certain businesses.”

Personally, and speaking as a registered Democrat, I don’t care who’s in the White House or who gets the credit for economic policies which could bring us 3% growth. President Clinton brought the country 3.9% GDP growth during his 8 years. That’s better than either Presidents Bush or President Reagan and, yes, significantly better than President Obama.

Maybe there’s something to this recent Trump-Schumer and Pelosi romance. The President has a three-pronged approach which he asserts will get this nation’s growth agenda moving at 3% or more: (1) private-public infrastructure spending, which is traditionally a Democratic idea; (2) reduced regulatory oversight, typically Republican dogma; and (3) tax reform. In the old days this was a bipartisan idea. Do you remember that Congressman Dick Gephardt (D-Missouri) and Senator Bill Bradley (D-NJ) were the leaders and co-sponsors of what was called the 1986 “Reagan” Tax Reform Act? It should be again.

I say, “What do we have to lose by trying?”


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