These five things could drive a new era of speedier economic growth

Through the last five years of crisis, recession, and slow recovery, the overwhelming debates over the economy have been cyclical. How much fiscal stimulus? Can easier monetary policy help? When will housing return to normal?

But over longer time horizons, what drives a stronger economy and higher incomes is people figuring out how to do things better: How to make more or better stuff. To economists, the underlying drivers of higher innovation and productivity are something of a black box.

But it’s important to try to understand what specific innovations, discoveries, businesses strategies and the like will make for a more prosperous U.S. economy in the years ahead, in no small part because Washington should be encouraging these things. That’s where a new report from the McKinsey Global Institute comes in. The in-house think tank of the consulting giant has tried to assess and quantify some of the specific potential drivers of stronger U.S. growth over the decade, and decades ahead.

Game changers- Five opportunities for US growth and renewal - McKinsey & Company

There’s a lot of guesswork in here, and even a bit of sloganeering (it seems like “Big Data,” for example, one of those terms that has come to mean a bit of everything and anything). But the report offers a nice counterpoint to a more pessimistic view of the U.S. economic outlook. Yes, the one-time economic boosts of the post-war years, such as many more Americans going to college and women entering the workforce, have largely run their course. And the economic growth of the 1990s and 2000s seems to have been driven more by financial bubbles than by durable growth. But that doesn’t mean there aren’t some things on the horizon that could create genuinely strong growth over the years ahead. By McKinsey’s low-end estimate, they add up to $1.2 trillion in economic benefits by 2020, which is around 5 percent of what the Congressional Budget office forecasts GDP will be that year.

So what do the McKinsey researchers see as big-time economic drivers for the future? They won’t be unfamiliar to readers of this blog; what is new is the attempt to apply a systematic approach to analyzing the scale of their impact on overall economic activity and job creation.

Energy. McKinsey sees increased shale gas production, particularly through horizontal drilling and hydraulic fracking, as driving an extra $115 billion to $225 billion in direct economic activity in the energy sector by 2020. But they envision follow-on effects to a range of energy-intensive manufacturing businesses, such as chemicals, fertilizers, iron and steel, glass, paper, and plastics packaging, plus all the support industries, ranging from transportation services to accountants, that contribute to those businesses.

Trade. For most of the 1980s and 90s, the United States's trade with the rest of the world in knowledge-intensive manufactured goods was roughly balanced. That has changed since the late 90s, and unlike other leading industrialized countries, the United States runs a trade deficit even in the sophisticated goods like chemicals, semiconductors, and automobiles in which we would seem to have a comparative advantage. That deficit was $270 billion in 2012, by the researchers’ estimates. The McKinsey researchers believe that deficit could be narrowed or even erased with better strategies to fund research and development, reforming the U.S. regulatory system, and aggressively pursuing new export markets. It’s worth adding, though, that all that is easier said than done.

Big Data. Can major economic gains come from the ability of companies to better vast repositories of data increasingly available in fields like retail, manufacturing, health care, and government? Maybe! Manufacturers, for example, may be able to produce more efficiently thanks to sensors embedded in equipment. Data analysis could yield insights into how to make health care cheaper and better. The researchers note that there are ambiguities in privacy and intellectual property laws to be made clearer.

Infrastructure. The United States is on track to spend about 1 percent of GDP less on infrastructure investment each year over the coming years than the McKinsey researchers think is warranted. They emphasize that spending on roads, highways, and transit can interact with some of the other possibilities; for example, cheaper natural gas could offer more economic benefits if there are also better transport networks to allow manufacturers to take advantage of cheaper energy to expand.

Talent. The United States has fallen behind many of the other industrialized nations in the proportion of young people receiving advanced education at a time that such education is more important than ever. The nation may be able to reverse that by both investing in U.S. schools and increasing the number of skills-based visas for immigrant workers. This too fits in the category of “easier said than done,” however; most everyone agrees that a better education system would reap economic benefits for the United States, the question is how to make it better.

One can think of this kind of report, said co-author James Manyika, as something of a counterpoint to arguments that we’re in for a long period of slower growth than the United States and other developed nations became accustomed to in the post-war years (for example, Tyler Cowen’s “The Great Stagnation,”).  We may not be sure that these growth drivers will pan out, and in some cases there are major policy changes needed to make them materialize. But it at least offers a vision of where the growth of the future might come from.

Perhaps we ate the low-hanging fruit of growth. But there is some more fruit on the tree, maybe a little higher up, but just as delicious.

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