The return of great expectations for US growth

McKinsey Global Institute has identified five mutually reinforcing “game changers” that can spur productivity growth, boost gross domestic product by hundreds of billions of dollars and generate millions of new jobs by 2020, write Laura Tyson and James Manyika in Financial Times.

The Bureau of Economic Analysis recently announced that US output grew at an annualised rate of only 1.7 per cent during the second quarter of 2013. The figure was later revised upward – to 2.5 per cent – but there was something truly surprising about the reaction to the earlier, lower number. This sluggish performance was actually treated as good news.

The Great Recession, it seems, has put an end to great expectations for the US economy. As Washington remains gridlocked, business leaders, public officials, and commentators alike have begun to accept lackluster growth and depressed employment levels as the new normal. But the new normal may prove to be much more robust than anticipated.

Recent research from the McKinsey Global Institute has identified five mutually reinforcing “game changers” that can spur productivity growth, boost gross domestic product by hundreds of billions of dollars and generate millions of new jobs by 2020. These game changers are continued expansion of shale gas and oil production; increased trade competitiveness in knowledge-intensive goods; the potential of big data analytics to raise productivity; increased investment in infrastructure, with a new emphasis on efficiency and cost; and a more cohesive and effective system of talent development in education.

Each of the game changers has the potential to boost annual GDP by at least $150 billion by 2020. In most cases, the potential is much greater—almost $700bn by 2020 for shale energy, and more than $1.5tn by 2030 for talent. The impact on employment is also striking, with energy, infrastructure, and trade competitiveness potentially creating more than 1.5 million new jobs each by 2020.

These opportunities can exert immediate demand stimulus effects that boost the economy’s growth in the short term and longer-term enabling effects that build its competitiveness and productivity well beyond 2020. The shale boom, for example, has already coaxed private capital off the sidelines to invest in both oil and gas production and energy-intensive manufacturing. Big data analytics is already being adopted by US companies across a wide range of sectors, but it will take time to reach critical mass and raise sector-wide productivity. An increase in infrastructure investment would be a powerful short-term stimulus, and its effects on productivity would strengthen as the nation’s capital stock deepens.

The US has the resources to pursue these opportunities—and to do so without getting bogged down in a battle royal over federal funding. In fact, we estimate that more than 90 per cent of the initial investment required in shale energy, 70 per cent in trade, and 60 per cent in big data adoption will come from the private sector. Even in areas such as infrastructure and talent development, state and local governments will be driving forces—and businesses will have to become more actively engaged.

To illustrate the potential that is waiting to be unlocked, take a closer look at just one of these areas: increased trade competitiveness in knowledge-intensive goods such as automobiles, aircraft, semiconductors, and pharmaceuticals. As a world leader in R&D spending, the US should dominate in these categories. Yet it is one of the few advanced economies that runs a trade deficit in these products—one that has ballooned from $6bn in the early 1990s to $270bn in 2012 (in 2005 dollars).

It's tempting to write this off as inevitable – yet more evidence of globalization swallowing US manufacturing jobs. But while the trade balance reflects a range of factors, including monetary policy and the value of the dollar, there is an opportunity to reverse this trend, especially now that an abundant supply of cheap natural gas is lowering energy costs and making US manufacturing more competitive. Although fully realizing the shale boom hinges on whether energy producers can successfully mitigate environmental risks, this development offers another cause for optimism on the trade front. The stage is now set for increased US petrochemical production that can transform the current $25bn trade deficit in chemicals into a substantial surplus.

And there are promising signs of renewed competitive strength in other export sectors as well. The US auto industry is not only bouncing back, but is beginning to stake out a niche in next-generation hybrid and electric vehicles. Foreign carmakers are now investing in the Southeast, and may eventually begin sourcing more parts and components in the US. In aerospace, US exports of commercial aircraft have nearly doubled in real terms since 2009, driven by demand growth in Asia and the Middle East. Industry analysts project that global aircraft fleets will double in size over the next 20 years, and the US is well positioned to capture a large share of this growth. US makers of medical devices can similarly capitalize on growth in emerging economies, which are rapidly expanding their health-care systems.

To build on this momentum, US businesses will need to move quickly to take advantage of growth in emerging export markets, new technologies, and changing factor costs. If the United States makes a concerted push to close the trade deficit in knowledge-intensive industries to roughly the same level as in the early 1990s, it could increase annual GDP by $590 billion annually by 2020 and create 1.8 million new jobs.

Supportive actions by the public sector are essential to taking advantage of game-changing opportunities. In the case of trade, most economists agree that possible new trade agreements like the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership have the potential to play a catalytic role. Federal policymakers should also implement domestic policies, including corporate tax reform, to foster a more competitive business environment.

State and local governments can also drive national competitiveness by promoting local export industries, attracting foreign direct investment, and developing the necessary infrastructure. And all levels of government should take a fresh look at streamlining cumbersome regulations and lengthy permitting processes that bury too many projects under red tape.

If young Americans are to enjoy the same increase in living standards over their lifetimes as previous generations, settling for stagnation can’t be an option. The US economy needs to jumpstart job growth and productivity gains. All five of the game changers have the potential to do just that—restoring confidence and setting the stage for greater prosperity by 2020 and in the decades that follow.

This article originally ran in Financial Times.

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