Economic advice for Donald Trump and Jerome Powell: First, do no harm
Subscribe to enjoy similar stories. If US economic growth is so good, then why does the Fed need to cut interest rates? That was essentially the question put to Federal Reserve Chair Jerome Powell recently after a speech in Dallas. It would be more constructive to examine the premise—why is growth so good?—and ask what the Fed and others can do to keep it that way.
America’s real GDP is on track to exceed its pre-pandemic trend for the second straight year. Typically, the Fed might worry that strong growth is a sign that the economy is at risk of overheating, but not this time. Inflation fell.
The extra growth largely reflects higher productivity and a faster-growing workforce. Supply-driven growth is not inflationary; to the contrary, it can be crucial for rebalancing supply and demand and lowering inflation. Underpinning the success is growth in labour productivity, which has averaged 2.3% in the past two years, about half a percentage point faster than in the four years before covid.
While it may not sound like much, that difference would shave almost 10 years off the time it takes to double the level of real GDP. Except for a brief period in the 1990s, however, sustaining a higher pace has long been difficult. Judging the sustainability of the current productivity uptick requires examining its roots.
One good sign is that the sizeable pickup in new business applications that started early in the pandemic is ongoing. Also, research shows that the applications led to new businesses with employees, especially in the tech sector. After decades of a falling startup rate, the US economy has become more dynamic.
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