Has America lost its economic dynamism?

Washington

ON this Labour Day, the American economy - the source of jobs for almost all of us - is full of promise and peril. It is hard not to be impressed with its job-creation capacity. Since the low point of the 2007-09 Great Recession, payroll employment has increased by 21.7 million jobs, with strong growth under both President Obama and President Trump.

Just how much credit they deserve for the economy's recovery is unclear. An alternative explanation is that the underlying rhythms of the business cycle drove the expansion. It's an open question. Mr Trump claims that, but for the Federal Reserve's high interest rates, economic growth would be stronger. His critics respond that his chaotic "trade wars" have weakened business confidence and corporate investment.

However this argument is resolved - both points might be true, or neither - there are bigger issues. As the economist Joseph Schumpeter (1883-1950) asked years ago: Can capitalism survive? Can our system, whatever its label, achieve a better balance between economic growth and economic security? Can we get the benefits of "disruption" without the social costs?

The conventional wisdom is that the economy has already become more disorderly. Old-style capitalism is on the upswing. Workers and managers are more exposed to disruptive change. But does the evidence corroborate conventional wisdom?

Consider a new study by economist Joel A Elvery of the Federal Reserve Bank of Cleveland, who examined how workers' occupations had altered from 1860 to 2015.

He placed all workers in one of 23 large occupational groupings (examples: farmers, labourers, engineers and managers) and then monitored what happened to the various groupings over time. The sharper the decline of some occupational groups and the rise of others gauged the magnitude of economic disruption.

Some changes, though familiar, were stunning. Farming (including fishing and forestry) dropped from 43 per cent of employment in 1860 to 1 per cent in 2015. In an interview, Mr Elvery credited mechanisation (tractors and the like), better seeds, more fertilisers and more irrigation for the shift. Over the same period, the number of non-farm labourers fell from about 10 per cent of employment to about 4 per cent. The bulldozer was a crucial cause, Mr Elvery noted. "One bulldozer could do the work of 50 people," he said. The impact was enormous.

The study's overall conclusion, however, was surprising and counterintuitive. Americans have been conditioned to think that present economic disruptions are at, or near, historical highs. Markets are cruel, hardhearted and volatile; job insecurity is on the rise. But that's not what the study found. Instead, it concluded: "After 100 years of dramatic change, the mix of occupations has been more stable since 1970." Occupational disruption is about half the level of the peak decades, the 1900s and the 1940s.

In theory, the stability of the occupational structure can be reconciled with rising economic insecurity. As Mr Elvery pointed out, people can lose their jobs without switching occupations. For example: Unemployed journalists can - perhaps - find other journalism jobs, as opposed to becoming rocket scientists. But, again, this does not seem to be what's happening.

A more likely possibility is that, in many different ways, the US economy is becoming less dynamic. The most significant evidence of this is "The Rise and Fall of American Growth", by economist Robert J Gordon of Northwestern University, an encyclopedic overview of technological change since the Civil War. Greatly simplified, Mr Gordon's thesis is that the innovations up to 1970 (cars, airplanes, telephones, indoor plumbing, television, air conditioning, modern pharmaceuticals and more) dwarf the Internet as a source of rising living standards.

Other indicators point in the same direction. The business startup rate has declined. Workers are moving less frequently to find new jobs. Productivity growth (aka, overall efficiency) has lagged. Large firms are returning sizeable amounts of cash to their shareholders, arguably because they can't find attractive investment opportunities or, possibly, because they have become more risk-averse.

The relative stability of the occupational structure fits the pattern. What connects all these trends is an impulse to stay with what's familiar. Although this is understandable for individuals, the consequences for society as a whole may be less benign. The capacity to raise incomes is essential for political legitimacy, because it increases private living standards and provides funds for government.

When that capacity gets corroded, the result is a more contentious society as various groups compete for limited economic resources. But we are left with a paradox: People's feelings of insecurity have outrun actual instability. To restore dynamism, we may need more change. That is the long-term peril that should worry Americans on this Labour Day. THE WASHINGTON POST WRITERS GROUP