Upward revisions of gross domestic product growth are the order of the day. In the last few weeks, we’ve seen Wells Fargo, the Wall Street Journal economists survey, and the Congressional Budget Office raise their 2021 growth forecasts for the United States to 6% or better. And now, the International Monetary Fund’s April World Economic Outlook is calling for 6% growth for the global economy, up from its 5.5% January forecast.
We’ve seen nothing like these powerful annual numbers since 1983, when the real GDP growth tally was 7.9%. After all the recent misery, have we entered an exceptional high-growth era that will continue until mismanagement or misfortune brings an end to it? Or is it something else?
Well, as you might guess, we can’t exactly call this a new golden age. Still, we may be seeing something more than a strict return to the pre-pandemic economy.
To be sure, most of the projected high growth is because the economy is returning to the turnpike it was traveling when the coronavirus-induced shutdown knocked its engine into a ditch. Powered up by stimulus dollars, with wheels spinning and then accelerating, it’s ready to pick up speed. But this situation is also akin to engaging in a brief war and then regaining our footing in a world that looks a little different than it did before. What can happen was described by economist Mancur Olson in his 1982 book, The Rise and Decline of Nations. Counterintuitively, many nations that lose wars come back stronger than those that win. The losers are generally forced to rebuild, discover new leadership, and establish new social networks. Out of necessity, they become more productive.
In that sense, there may be more going on than just a return to the previous turnpike.
As Federal Reserve Chairman Jerome Powell put it recently, “We’re not going back to the same economy.” While the economy was in the ditch, new discoveries were made about organizing virtual offices, schools, and healthcare provisions. We saw breakthroughs and huge investment increases in information technology. New distribution channels emerged, and warehousing became more efficient. Some regulations were wiped off the books, and people learned they could accomplish a lot without traveling that much. For some, the cost of doing business went down.
It’s helpful to picture the situation by thinking about what economists call the Production Possibilities Frontier, or PPF. This curved surface shows the limits of production for a fully employed economy when viewed in terms of just two goods — let’s say manufactured goods and services. It’s possible to move along the line and produce different combinations of the two goods or to move below the line by producing less. But it’s impossible to move above the line and produce more without a change in the available resources or improved production techniques.
When the pandemic hit, we moved below the line. The economy slipped inside the PPF and continued operating at a lower level of output. But by slipping off the surface, a lot was learned about how to reconnect a disrupted economy. By necessity, we figured out how to do some things differently and at a lower cost.
This means that the tragic episode may have brought a wee bit of economic sunshine. It generated a new, higher PPF. All of this suggests that we are experiencing significant gains in labor productivity. The downside, especially for unskilled workers with less than a high school education, is that some people will face an even more difficult challenge in getting hooked to a changing post-pandemic economy. So, while GDP growth may accelerate at an unusually high pace for a while, there will be pockets of frustrated people who will feel left behind, because they are.
Perhaps this is a good time for the Biden administration to push for improvements in technical education and free community college. But enhanced access is just part of the solution for those who lack an upper-level education. Making sure the right people understand the need to engage with new, and hopefully better, work opportunities is perhaps the most difficult part.
Meanwhile, a 6% growth economy will lift a lot of boats.
Bruce Yandle is a contributor to the Washington Examiner's Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and a dean emeritus of the Clemson University College of Business and Behavioral Science. He developed the “Bootleggers and Baptists” political model.
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