Economist contends a mature economy will encounter slower growth

By Scott Benjamin

If the national unemployment rate in 2019 was at its lowest level in 50 years. . .

If by early this year 68 percent of the people surveyed in a Gallup Poll were satisfied with the economy - a 20 percent leap from three years earlier. . .

Then why did the gross domestic product (GDP) only grow 2.86 percent in 2019 when in the 1990's it increased by more than four percent in five different years?

University of Houston Economics Professor Dietrich Vollrath stated in his recent book, "Fully Grown" (The University of Chicago Press, 260 pages) that a "stagnant economy is a sign of success."

In effect, Vollrath, who writes the Growth Economics Blog, indicated that after you have assembled the roster to be a World Series champion, it is difficult to continue to grow in leaps and bounds.

He wrote that an aging population, a shift from buying more services instead of goods and reductions in the relation of workers and geographic mobility are largely responsible for the slow down.

In a review, "The New Yorker" stated, "Taken together, slower growth in the labor force and the shift to services can explain almost all the recent slowdown, according to Vollrath. He’s unimpressed by many other explanations that have been offered, such as sluggish rates of capital investment, rising trade pressures, soaring inequality, shrinking technological possibilities, or an increase in monopoly power. In his account, it all flows from the choices we’ve made: Slow growth, it turns out, is the optimal response to massive economic success."

Through the second half of the 20th Century GDP grew at an average of 2.25 percent and during the first 20 years of the 21st Century it has averaged about 1.65 percent.

Vollrath stated that there have been no major changes in tax or regulation policies that would have caused the gross domestic product to decline over the last 20 years.

Actually, federal tax rates have been lower, since there have been large tax cuts in place in 14 of those 20 years. Yet there has been slower GDP growth that over the previous generation.

Former Republican President George W. Bush signed a 10-year across-the-board tax reduction in 2001 that was extended by former Democratic President Barack Obama through 2011 and 2012.

Republican President Donald Trump signed a massive tax cut in late 2017.

GDP growth has been meager in comparison to the period bnetween 1960 and 1999.

Vollrath's research also raises questions about whether markup and scale are more important than tax rates and regulations in attracting companies to various states.

"The motive for firms, which I believe is hard to argue with, is to generate net profits," he stated. "And these net profits comes from the interaction of three components: markup, tax rate and scale."

"[Markup] captures the price relative to marginal cost for each unit produced," Vollrath continued. "Scale, however, captures how many units can be sold. Scale multiplied by markup provides total profits for a business."

He added, "Even firms with small markup, like Walmart, can make massive total profits because their scale is so big. . . The tax rate matters for net profits, yes, but in relation to markups and scale, it may not be that important."

"The implication of this is not that we should set all taxes to 100 percent or that regulations are cost less to the economy," wrote Vollrath. "Without some profits, no firm would bother to operate at all. With an onerous enough set of regulations, no firm would find it worth the trouble of complying and so would shut down. But the evidence indicates that taxation and regulation did not have a significant effect on the ability of firms to produce goods and services, and specifically there was no substantial shift in government policies around 2000 that could explain the growth slowdown."

Vollrath notes that the World Bank rates New Zealand as the most business-friendly country in its index. Yet it has just 4.8 million people, and receives scant international investment in comparison to China, which has cumbersome barriers, but 1.3 billion people, the world's largest population.

"The logic extends to the United States where mark-ups and scale seem more relevant than taxes and regulation in explaining the net profits firms can earn, and hence for the incentives they have to expand and invest and innovate," the economist stated. "Just think about where firms choose and invest within the United States. Yes, places like California and New York low on the ALEC {American Legislative Exchange Council] -Laffer Index [partly named for supply-side economist Arthur Laffer], but firms are desperate to get into the markets. Why? Because they are already big economies in their own right, and scale matters."

"Think of Salt Lake City, which according to ALEC-Laffer is in the state with the most business-friendly environment, Utah," wrote Vollrath. "Let's say that the low taxes and high regulatory burden mean that your business keeps 95 percent of its raw profits (I.e. the effective tax rate is only 5 percent).""In contrast let's assume that the high taxes and regulatory burden in the New York City area, in last place in the ALEC-Laffer ranking, means you keep only 50 percent of your profits."

The economics professor added, "Would you want to operate a business that served the Salt Lake City area or the New York area?"If the scale of the two markets were equal you'd opt for Salt Lake City, because your net profits would be much higher. But of course it isn't equal. Greater Salt Lake City has about 1 million people. Greater New York has about 20 million. By raw numbers of people alone, serving twenty times the possible customers swamps whatever difference in taxes might be faced. Total profits in Greater New York would be about 10 times higher than is Salt Lake City, even with the difference in tax rates. . . Scale matters, and that is a key reason we do not see any appreciable effect of regulation and taxation on economic growth."

In the most recent ALEC-Laffer rankings, Connecticut is ranked 41st overall, but California, which began enjoying a economic surge during former Governor Jerry Brown's recent reign, is ranked 47th. This is a state that has moved past England and is now the fifth largest economy in the world - after the United States, China, Japan and Germany.

Connecticut has been hindered, as state Commissioner of Economic Development David Lehman of Greenwich told Patch.com last year, because it is largely suburban but can't compete with the larger innovation hubs, such as the Route 128 Corridor in Massachusetts. Reportedly, General Electric didn't add one parking space when it moved its operations from Fairfield to Boston because of all the transit that is available in the Beantown.

Former U.S. Rep. Sam Gejdenson (D-2) said on the WTNH-CH. 8-New Haven Capitol Report in 2017 that companies are not leaving Connecticut because of taxes or regulations, it is because "young people don't want to live here." He said if you could get five cities in Connecticut to attract millenials, it would also boost economic activity in the suburbs

According to Los Angeles Times business writer Michael Hiltzek, a Pulitizer Prize winner, the Golden State has never been ranked higher than 43rd in the first 12 years of the ALEC-Laffer rankings.

Hiltzik wrote that the ALEC-Laffer index gives demerits for regulation, cost of doing business. taxes and wages.

He stated that, "many of these categories aren't drags on a state's business climate, but reflections of its appeal. . . California is an expensive place to live, but that's because it's a desirable place to live. . . Yes, there are lots of regulations in California, but that's because that is one of the features that draw people in, such as its natural beauty and its climate, need safeguarding."

Connecticut is also a state that is expensive to live in but has natural beauty and a surprising diversity of cities, suburbs and rural towns for a state with just 3.5 million people.

Connecticut ranks ninth and California third as the most expensive states to live in, according yo the World Population Review.

Yet, last November the Wall Street 24/7 web site rated the state as the fifth best to live in, largely because of the higher than average salaries, a greater percentage than the national average of people with college degrees and a longer life expectancy.

For example, Connecticut's median annual household income of $76,348 is $14,400 higher than the national average.

But over the recent years more than 400 people per week leave the state, according to veteran economist Donald Klepper-Smith.

If it's such a great place to live, then why are so many people moving out? It can't be just the millenials that are leaving.

"Our economy has some problems," former two-time Democratic gubernatorial candidate Bill Curry said in a 2018 interview with Patch.com. "But it is actually doing fairly well. Our government is a public policy disaster. The fact that our economy is doing at least this well attests to its underlying strength."

He was referring to a state employee pension system that was only 29 percent funded, according to the March 2018 report from the state Commission on Fiscal Stability and Economic Competitiveness, the need to lower the cost of health care benefits for the state employees and a road network that was rated in a 2017 civil engineers study as being in the worst condition in the nation.

Vollrath wrote that a stagnant economy in the United States is actually a sign of success.

And Connecticut may not recapture the GDP growth of the mid-1980's when former Republican President Ronald Reagan's Pentagon budget had a bevy of projects being built by the Nutmeg State's defense contractors and the metro-Hartford insurance industry was expanding.

But still, some observers might find it disconcerting that there would be such a gap between quality of life and economic stability.

The answer may have come from retired Webster Bank economist Nick Perna of Ridgefield, a member of former Gov. M. Jodi Rell's (R-Brookfield) economic team, who told CT Mirror in April 2017 that Connecticut officials have resisted "short-term pain for long-term gain."