HOUSE_OVERSIGHT_014545.jpg

assistance and job training, and to the fact that the US has a high rate of incarceration that especially affects lower-skilled men.’? According to the report, several policy measures can boost prime- age male labor force participation, including * Increased investment in infrastructure © Systemic reforms in the criminal justice system and in immigration policies e Tax reforms ¢ Investment in education and training This demographic aspect of secular stagnation is undeniable. In fact, an October 2016 paper by a team at the Federal Reserve Board, “Understanding the New Normal: The Role of Demographics,””° shows that the slow pace of economic growth since 1980 and the more pronounced decline in the last decade could be predicted by a model looking at “fertility, labor supply, life expectancy, family composition, and international migration.” Thus, a glass half-full or half-empty perspective does not change the facts on the ground. There is little cause for near-term optimism with respect to the slower growth rate of the labor force. The general consensus is that the US labor force will grow at an average of 0.6% per year in the next several decades, compared with 1.6% from 1950 to 2000.7! In the shorter term, infrastructure investment and other policies highlighted above may boost the growth rate in the labor force, but it is hard to imagine growth rates reaching levels that would support President-elect Trump’s GDP growth targets of 3-4% ona sustainable basis.?? Secular Stagnation: Declining Productivity Growth Of all the theories put forth to explain the slow pace of this recovery, the one that has garnered the most attention is declining productivity growth. Of all the theories put forth to explain the slow pace of this recovery, the one that has garnered the most attention is declining productivity growth. It is also the most important issue in terms of its impact on future trend growth in the US, which in turn has the greatest impact on the long-term rate of earnings growth and equity market returns. As reviewed in last year’s Outlook, the techno- optimists and the techno-pessimists are on opposite sides of the debate on declining productivity growth. Both camps have garnered new members; even Federal Reserve Chair Janet Yellen and Vice Chair Stanley Fischer have joined the fray.” Most recently, in September 2016, the Brookings Institution hosted a conference with leading experts from both camps to debate the issue. We should note that debates on productivity are nothing new. They have surfaced during past periods of slow growth, as was the case in the early 1990s. Even some of the players are the same: Robert Gordon was a techno-pessimist in the early 1990s and remains so in the 2010s.4 Part of the productivity debate is philosophical. For example, one question pertains to the increased use of free digital services such as Facebook, Google Maps, Waze and Khan Academy. These services yield “consumer surplus,” defined as the benefits consumers derive from various activities over and above the price they pay. Should they be included in GDP if they are deemed “non-market” services—those that are provided free of charge or at a fee that is well below 50% of production costs? While social media such as Facebook may (or may not, depending on your perspective) provide a service greater than the advertisement revenues associated with the use of that service, some will argue that if such services do not have an associated market price, they are not part of GDP and therefore should not impact the calculation of productivity levels. As the volume and the impact of these non-market services increase, we believe that the methodology for measuring GDP will evolve to better reflect the value of these services. Such improvements in measuring GDP are not uncommon. The Bureau of Economic Analysis (BEA) conducts comprehensive revisions of the national income and product accounts every five years, with the goal of reflecting methodological and statistical improvements. Most recently, in 2013, the BEA expanded its definition of fixed investment to include expenditures on research and development and expenditures on artistic originals (e.g., books, music, television 12 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014545