Where Are We Now?

Pay attention to Dale Jorgenson instead of Donald Trump

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Posted in Contemporary economics

Presidencies are the most accessible narrative that Americans possess.  We habitually tell the story of the United States by connecting up administrations from George Washington to Barack Obama and beyond. But other frames can serve as well.

I’ve argued that Donald Trump’s victory was largely accidental, a combination of little-recognized trade shocks to the American economy cumulating over twenty-five years – Japan, Mexico, China – and the Hillary stopper in the bottle. Already there are signs, in the business arrangements Trump has made, that the 70-year-old trademark baron doesn’t expect to serve a second term.

The likelihood is that Trump will be a one-term president.  If so, like others of that ilk — Martin Van Buren, Benjamin Harrison, William Howard Taft, Herbert Hoover, Gerald Ford, Jimmy Carter, and George H.W. Bush – he will be fundamentally unimportant in the long run, except as a springboard to what happens next.

So what narrative horizon might serve better for the next four years? We should clear a place in story-space for the new integrated systems of national accounts. To put it slightly different, consider the prospects for world growth.  The principal expert here is Dale Jorgenson, 83, of Harvard University.  He’s been working on the measurement problem for sixty years.

The prospects are surprising, says Jorgenson.  After a century in which the US economy became the largest economy in the world and remained so throughout, a massive shift has taken place.  It will continue in the future. China will supplant the US as the world’s largest economy, if it hasn’t already, as India has surpassed Japan.

The world economy will continue growing at a brisk pace, around 3.5 percent a year, according to Jorgenson. But China and India will grow faster than the average, and the US, Germany, Japan, Russia and Brazil will grow slower.  Germany will continue to lead Russia, and Russia will lead Brazil.  Hence the new world order:  China, US, India, Japan, Germany, Russia and Brazil.

Does this amount to stagnation for the industrial democracies?  The “new normal,” Jorgenson says, is a much better term.

It is remarkable to think how short a time ago it was that governments had no real idea of the relative standing among nations and the well-being of their citizens (or lack thereof) beyond the accounts of travelers. Britain and the United States are well-established as sources of a “new” economics, but historian J. Adam Tooze, in Statistics and the German State: The Making of Modern Economic Knowledge (Cambridge, 2001), demonstrated that the Weimar Republic, along with the Soviet Union, Sweden and the Netherlands, was an important source of new ideas – in this case the statistical tools for management of economic systems that today we take for granted.

During the Nazi years in Germany, the Reich’s Statistical Office mutated into a fantasy of government control of every aspect of the economy. In 1945, the tradition was all but obliterated. Instead the national income accounts drawn up by Simon Kuznets in the United States became the standard, especially after Colin Clark and Richard Stone in Britain extended the system to other nations.

The new field of growth accounting received a further boost when Robert Solow in 1956 published a model of the sources of economic growth and the next year estimated that additions to the stock of capital and labor could account for as little as 15 percent of measured growth in the early twentieth century.  Improvements in technology, broadly defined, accounted for the rest.

In 1963, in “Capital Theory and Investment Behavior,” Jorgenson introduced refinements in measurement, notably the concept of the cost of capital, that changed the way economists have measure various inputs ever since.  In 1965, in “The Explanation of Productivity Change,” with Zvi Griliches, he added refinements in measurement of human capital in order to argue that the contributions to growth of education and investment had been greatly underestimated. Somewhat cheekily, they began their article with an epigraph from Solow: “But part of the job of economics is weeding out errors. That is much harder than making them, but also more fun.”

Harvard’s economics department hired them both, Jorgenson from the University of California at Berkeley, Griliches from the University of Chicago, as part of a determined attempt to catch up with economics at the Massachusetts Institute of Technology, where Paul Samuelson and Solow held forth across town. Jorgenson’s sixty-year quest to describe and explain the growth process. Griliches had been recognized with the John Bates Clark Medal as the most influential economist of his cohort under the age of 40 in 1965; Jorgenson was similarly honored in 1971.

In the 1970s, Jorgenson battled with Edward Denison, of the Brookings Institution, to define the theoretical underpinnings of national income accounting.  He teamed up with William Nordhaus, of Yale University, to identify with increasing precision, the role played by natural resources, energy in particular.  In the ‘80s, he became an influential adviser to governments on pro-growth tax policies. He ecame an early supporter of a tax on carbon emissions.  By the ’90s, his interest shifted to computers, and the burgeoning role of information and communications technology, and software in particular, in growth statistics. He became involved in arguments with his old rival Solow, as well as Paul Romer, then of Stanford University, and Robert Lucas, of the University of Chicago, who had ventured models of their own of the determinants of long-term growth. Jorgenson’s long-time friend and collaborator Griliches died in 1999, but Jorgenson has soldiered on.

In the ’00s, his attention shifted back to the national income accounts and related data.  Various major systems in the US had arisen from different impulses at different times. The Bureau of Economic Analysis of the Commerce Department produced the core data of  gross national product the National Income and Product Accounts.  The Bureau of Labor Statistics collects prices, compiles employment, wage, and salary data, and prepares productivity statistics; the Federal Reserve Board produces the flow-of-funds accounts, including balance sheets. The Census Bureau conducts business and population surveys. The Internal Revenue Service creates tax-based data through its Statistics of Income Division. Jorgenson and Steven Landefeld, director of the Bureau of Economic Analysis, undertook to incorporate the cost of capital concept in the measurement of all assets, including computers and software.  A New Architecture for the US National Accounts (Chicago) edited by Jorgenson, Landefeld and William Nordhaus, appeared in 2006, under the aegis of the National Bureau of Economic Research.

Jorgenson’s latest project has the unlovely name of the World KLEMS Initiative, a joint project with the US Conference Board, designed to generate industry-level data sets of outputs and inputs of capital (K), labor (L), together with inputs of energy (E), material (M), and services (S).  “The modest rates of innovation needed to maintain long-run growth are usually concentrated in a relatively small number of sectors,” Jorgenson writes in The World Economy: Growth or Stagnation? (Cambridge, 2016), a book of surveys edited by Jorgenson, Kyoji Fukao, and Marcel Timmer.

With its 15 essays, 58 authors, and 199 countries, The World Economy contains more than you probably want to know. But it is the latest word on changes in the distribution of income, wealth, prospects and power, (at least potential power), among nations around the world.  Other daunting economic measurement projects have been undertaken over the years.  But none is of greater significance.  Never mind the weeds of growth accounting.  You could do worse than fastening on the horizons of relative growth hither and yon for the next four years as a means to keep calm and carry on.