We Need More Economic Growth. How?

Paul Krugman observes that even if we kept up the growth rate of the last quarter -- 3.5 percent annualized -- for the next eight years, unemployment would likely only drop to about 6.3 percent, still a bit too high. (This comes from a hard-and-fast comparison with the Clinton years, not any kind of advanced modeling.) Given broader concerns that this recession is unique because employment expansion is lagging even further behind economic growth than usual, Krugman's point underscores the need for more growth going forward.

From where, though? Economic observers have been puzzling over this question for months now, wondering what industry, or hopefully, industries, will take off and help propel the economy upward. One good sign is yesterday's news of unexpected profitability at Ford, which found sales rising both at home and abroad. Now, Noam Scheiber flags an interesting report from the Wall Street Journal: Companies that saved for a rainy day may be getting ready to start investing again, especially with more signs of growth. Right now, the 500 biggest U.S. companies are holding 9.8 percent of their assets in cash.

Large cash balances are both a curse for the economy and a potential blessing. Hoarding means companies are spending and investing less, damping economic growth. But that leaves them with more cash to deploy as the economy improves, giving them a freer hand to acquire, and to restart hiring and capital spending.

Large cash balances are "great news for the macroeconomy," says Mr. Stendevad. "A lot of firms now are in a position ... to start reinvesting again, and that ultimately is what is gong to drive employment."

Let's hope, for the sake of the economy, that this is indeed the case. We can also hope for a "crowding in" effect thanks to government spending. The great fear of running a big a government deficit is that you end up with conditions that make private borrowing very hard. But during a recession, you can get the opposite effect if that deficit is used for economic stimulus: The government creates better conditions for private investors, bringing them back to the market -- and that's precisely what economists are expecting these firms to do.

Over the long term, though, some kind of industrial policy, alongside major upgrades of our national infrastructure -- transportation, energy, and communications -- will likely be needed to develop a real foundation for future growth. I'm not sure I've blogged about it before, but this package of articles over at Democracy: A Journal of Ideas does a nice job laying out the case that the federal government should be doing more to provide a strategic backstop for private business.

-- Tim Fernholz