The US economy has broken a record. We are in the 121st month of the current economic upturn, which means this is the longest unbroken expansion on record. But can this continue?
Conventional economics says not. Although President Trump’s 2017 tax reforms might have had a small positive effect on business productivity and hence potential growth, their main effect was simply an orthodox fiscal expansion: the OECD estimates that cyclically-adjusted government borrowing rose from 3.4 per cent of gross domestic product (GDP) in 2017 to 6.6 per cent this year. In theory, this pushes the economy closer to a point of full capacity and full employment, at which point growth stops.
But there is another view. It is that growth can be self-sustaining. As the economy expands, the full employment point retreats further into the distance and so the expansion can continue. This is what happened in the 1950s and 1960s. Despite fuller employment than we have now, inflation was low and recessions were short and shallow and growth on average was strong.
There are several mechanisms whereby growth can beget growth. A strong economy raises both profits and animal spirits, thus giving entrepreneurs the motive and means to invest and expand. As full capacity approaches, bosses have stronger incentives to increase efficiency. And labour shortages and rising wages encourage companies to invest in labour-saving techniques that raise productivity.
Oddly, though, the evidence that these mechanisms are operating right now is only mixed. In the past 12 months, non-residential investment has risen only 5.2 per cent in real terms, less than it did in the early 2000s. And labour productivity in the business sector has risen only 2.4 per cent in the past 12 months, which is only a touch above its long-term average. The idea that robots are taking people’s jobs is one that is much more discussed than observed.
These facts, however, are consistent not only with the possibility that growth is not begetting growth but with another one – that we are not yet near the point of full employment and so the need to invest in labour-saving capital or to increase efficiency is not yet pressing: a wider measure of unemployment, which includes those out of the labour market who want to work, shows the jobless rate to be over 7 per cent, higher than it was in 2000. The fact that wage inflation has stopped rising is also consistent with this.
Even if there is a point at which full capacity chokes off the expansion, we don’t seem to be near it yet.
On this point, however, bond and equity markets seem to disagree. Equity markets are pricing in a continuation of non-inflationary growth: they are reasonably priced if unemployment and inflation stay low, but not otherwise. With the yield curve inverted, however, the bond market is suggesting that we are approaching a recession, albeit not one caused by higher inflation.
This disagreement, however, is not the only one. What’s at stake here is the nature of capitalism. If growth can sustain itself, then the economy can work to the benefit of ordinary working people. If on the other hand, growth ceases when so many are still out of work or in low pay, then things are much less healthy.
