Are These 5 Things the Headwinds to Economic Growth?

U.S. economic growth does not appear to be performing up to its potential, and there is little evidence that short-term fixes, such as the Fed’s quantitative easing program, have created any more net new jobs than the natural recovery process would have anyway.  One is led to the thought that if the US is going to make the most of the coming decades even as the country’s population ages and competition from emerging market countries increases, that the real impediments to more robust economic growth are longer-term structural issues that have been building for many years.

Speaking at the Global Financial Leadership Conference (GFLC) held this past week in Naples, Florida, Nobel Laureate Gary Becker offered some ideas about the key structural headwinds constraining US economic activity.  Number one on his list was education reform.  Once a global leader in educating its children, the United States has been slipping further and further behind other countries in K-12 education.  What makes the education gap all the more critical is that technological change has shifted strongly in favor of the creation of skilled jobs.  So the failure to prepare the country’s youth properly has a much greater impact on longer-run economic growth than it would have in the past.  [As a side note, the GFLC participants also heard from Sal Kahn, founder of the Kahn Academy, and an incredibly innovative thinker on educational practices.]



Next on Professor’s Becker’s list of problems to solve was immigration reform.  Immigration has typically brought to the U.S. some of the brightest and most ambitious, creating economic growth at an enhanced pace.  By simplifying the immigration process, and perhaps putting a price on it, the U.S. could better address the likely shortage of skilled workers that could hinder growth and prevent the country from taking advantage of advances in modern technology.  The immigration argument is all about expanding the economic pie more rapidly, to the benefit of the whole country, rather than seeing immigration as competition for a fixed number of jobs.

Professor Becker also focused on three other related issues involving government policy, including tax reform, controlling entitlement spending, and reducing the regulatory burden to improve international competitiveness.  For Professor Becker, tax reform is about tax simplification which would allow for lower marginal tax rates.  He is especially concerned about the complexity and high rates of corporate taxes, which he argues have the unintended consequence of being passed on to labor and seriously constraining job growth.  Regarding entitlements, his proposals focus on linking the age for social security benefits to rises in the average life expectancy and, hence, keeping pace with the demographic shifts coming from much improved health care.  And regarding U.S. competitiveness, his approach was to simplify regulations, such as sharply raising capital requirements for banks then allowing the financial system much greater flexibility without thousands upon thousands of pages of new rules and regulations.

Professor Becker labeled his solutions as “Five Not So Easy Pieces”, recognizing in many cases the political impracticality of the suggested reforms.  Nevertheless, his underlying observation was quite powerful.  Tackling the key long-term structural issues faced by the U.S. economy is essential to long-run economic health or the United States may be doomed to decades of slower than potential economic growth.

Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact. Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He has authored five books on international finance.

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