New column: The fundamentally strong economy

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My column in the new TIME that goes on sale Friday (it’s got Lincoln, FDR, Obama and McCain on the cover) is already up online. It begins:

John McCain’s claim that “the fundamentals of our economy are strong,” uttered just before the financial crisis turned dire, may go down as one of the great blunders of presidential-campaign history. “Senator McCain, what economy are you talking about?” Barack Obama exclaimed hours after the words escaped his opponent’s mouth. The mocking TV ads soon followed, and as the weeks wore on and financial jitters gave way to near collapse and certain recession, McCain’s statement began to evoke unsettling memories of Herbert Hoover, who said similar things in the early 1930s.

Less likely to be remembered is running mate Sarah Palin’s defense. “He means our workforce, he means the ingenuity of the American people,” she said. “And of course that is strong, and that is the foundation of our economy.”

Palin was actually on to something. Our workforce and the ingenuity of the American people are in fact among the most important of economic fundamentals. And it’s not at all crazy to argue that these fundamentals are still strong.

When economists talk about such matters, they focus on the concept of productivity. “Productivity growth,” wrote economist (and now Nobel laureate and New York Times columnist) Paul Krugman back in 1990, “is the single most important factor affecting our economic well-being.” It was growth in productivity — most commonly measured as economic output per hour worked — during the Industrial Revolution that powered the rise of the West out of millenniums of stagnation. It was a productivity boom that ushered in America’s postwar era of mass affluence. Read more.

See, Sarah Palin and Paul Krugman agree about something. Why can’t we all just get along?

The column was inspired to a certain extent by University of Chicago economist Casey Mulligan’s op-ed piece in the New York Times last Friday, but Mulligan ended up being excised from it because confronting readers with both productivity growth and Mulligan’s marginal product of capital in one column was deemed by my editor (correctly) to be too much. Mulligan’s argument that the financial crisis simply doesn’t matter to the real economy was overstated, I thought, and I’ll post on that later today. But I did want to point out that we’re having this financial crisis because we borrowed too much money, not because there’s something fundamentally wrong with the U.S. economy. And at some point in the next couple of years–barring total financial breakdown–the fundamentals are going to start to matter again.

I didn’t give the actual productivity trend forecasts of Robert Gordon and Dale Jorgenson in the column because of a complication: I confirmed with Jorgenson that he’s sticking with his base-case forecast for the next decade of 2.4% labor productivity growth. But I didn’t get hold of Gordon until after my deadline, and thus was relying on what he told Business Week’s Michael Mandel back in February–that his estimate of the productivity growth trend was 1.78%. The last two quarterly productivity numbers from the BLS beat that trend, so it’s possible that he has since revised it slightly upwards. Which is why I didn’t want to put the exact February number in the column. I hope to talk to Gordon this afternoon, and will report back then.

The Krugman quote is from his book The Age of Diminished Expectations. Anything I’m forgetting?