US Economic Growth Is Over: the Short Run Meets the Long Run
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US Economic Growth is Over: The Short Run Meets the Long Run Robert Gordon Stanley G. Harris Professor in the Social Sciences, Northwestern University; NBER Distinguishing Between Secular No single image captures the present concern about secular stagnation and slowing Stagnation and Slow Long-term long-term economic growth better than The Growth Economist cover of July 19, 2014, showing a frustrated jockey dressed in the colors of the set of lively debates about future U.S. econom- American flag frantically trying to get some ic growth has engaged me as the lonely pro- movement from the gigantic but sluggish turtle Aponent of pessimism about the future against that he is riding. U.S. real GDP growth has grown three very talented proponents of what I have called at a turtle-like pace of only 2.1 percent per year in “techno-optimism.” In their best-selling book The the last four years, despite a rapid decline in the Second Machine Age (2013), Erik Brynjolfsson and unemployment rate from 10 to 6 percent. Almost all of that improvement in the unemployment rate Andrew McAfee have argued that the U.S. is at a has been offset by an unprecedented decline in “point of inflection” toward faster technological labor force participation, so that the ratio of change. In two public debates with them, I have lost employment to the working-age population has overwhelmingly; the techno-optimists have cap- hardly improved at all since the trough of the tured a consensus view that the future will be better recession, and as a result 10 million jobs have than the past, and that hope is understandable be- been lost forever.2 cause economic conditions in the U.S. have been so dismal during the six years since the beginning of I have recently (2014a) restated the case for slow 1 the 2008-09 financial crisis. Another series of de- growth over the long run of the next 25 to 40 years. bates has pitted me against my Northwestern col- At the same time, Larry Summers (2014a) has sig- league of 40 years, Joel Mokyr (2014). naled his alarm about a return of “secular stagna- tion,” a term associated with a famous 1938 paper This short paper reviews my case for long-run pes- by the Harvard economist Alvin Hansen. However, simism divided among two sets of explanations, Summers and I are talking about different aspects the “headwinds” and the decline of innovation that of the current American growth dilemma. His distinguishes the 80 years before 1972 from the 42 analysis concerns the demand side, “about how we years since 1970. The novelty here compared to manage an economy in which the zero nominal previous expositions is the merging of the short interest rate is a chronic and systemic inhibitor of run with the long run. The growth experience of economic activity, holding our economy back be- the U.S. economy in the decade prior to 2014 com- low its potential.”3 In contrast my version of slow bined with a widely accepted estimate of potential future growth refers to potential output itself. GDP growth out to 2024 results in estimated past and future growth almost exactly equal to the long- As the U.S. unemployment rate declines toward run growth rate that I formulated more than three the normal level consistent with steady non-accel- years ago. The conclusion of the paper combines erating inflation, by definition actual output catch- the long-term and short-term data on the growth es up to potential output. I have provided (2014b) performance of the U.S. economy. a layman’s guide to the numbers that link the THINK TANK 20: 185 Growth, Convergence and Income Distribution: The Road from the Brisbane G-20 Summit performance of real GDP and the unemployment Real GDP grew at an annual rate of 12.8 percent rate and have concluded that U.S. potential real between 1939:Q4 and 1941:Q4. By 1944, real GDP GDP over the next few years will grow at only 1.4 had doubled from the level of 1939. Most amaz- to 1.6 percent per year, a much slower rate than is ingly, the economy did not slide back into Depres- built into current U.S. government economic and sion conditions when this huge dose of fiscal stim- budget projections. My analysis suggests that the ulus was removed; labor productivity was actually gap of actual performance below potential that higher in 1950 than in 1944. concerns Summers is currently quite narrow and that the slow growth he observes is more a prob- The Demise of Growth Originates in lem of slow potential growth than a remaining gap. Headwinds, Not Technology Summers (2014b) has now admitted that his ver- sion of secular stagnation is obsolete. My forecast of growth over the 25 to 40 years is measured from 2007, not from now. The sources of Hansen’s 1938 version of secular stagnation was slow growth do not involve technological change, written prior to the invention of the concept of which I assume will continue at a rate similar to potential GDP and indeed of real GDP itself.4 Be- that of the last four decades. Instead, the source of cause there was no comprehensive measure of real the growth slowdown is a set of four headwinds, economic activity, there was no notion of aggre- already blowing their gale-force to slow economic gate productivity or its growth rate. When we look progress to that of the turtle; the four are demo- at today’s statistical rendering of the American graphics, education, inequality, and government economy in the late 1930s, we see that Hansen was debt. These will reduce the growth rate of real writing about an economy with healthy potential GDP per capita from the 2.0 percent per year that GDP growth but a large gap of roughly 20 percent prevailed during 1891-2007 to 0.9 percent per year separating the levels of actual and potential GDP.5 from 2007 to 2032. Growth in the real disposable income of the bottom 99 percent of the income Some have dismissed Hansen’s concerns by point- distribution is projected at an even lower 0.2 per- ing to the rapid growth in productivity that was oc- cent per year. curring as he wrote during what Alex Field (2003) has called the 20th century’s “most technologically While many authors acknowledge the demograph- progressive decade.” Some optimistic writers have ic headwind, its long-term quantitative impact on pointed to the upsurge in productivity growth that economic growth remains open to debate. By defi- occurred in the 1930s and 1940s as offering the nition, growth in output per capita equals growth possibility that history might repeat itself and lead in labor productivity plus growth in hours per to faster productivity growth over the next two de- capita. The slowdown in productivity growth that cades than even the productivity heyday of 1996- began 40 years ago was partly offset between 1972 2004.6 and 1996 by an increase in the labor force partici- pation rate of 0.4 percent per year, as females and The reality of 2014 is far grimmer than faced Han- baby-boom teenagers entered the labor force. In sen’s America of 1938, because America was about contrast during 2004-2014 the participation rate to receive a succession of lucky breaks that utter- has declined at an annual rate of 0.5 percent, and ly transformed the late 1930s gloom into postwar over the shorter 2007-2014 interval at an annual prosperity. Hitler’s invasion of Poland created a rate of 0.8 percent. doubling of export orders in the winter of 1939- 40. After the fall of France, the U. S. government This transition from a 0.4 percent increase to a 0.8 pushed the ignition switch on the Arsenal of De- percent decline accounts for a 1.2 percent reduc- mocracy, and before Pearl Harbor the share of tion in the growth of per capita real GDP for any total government spending in GDP had doubled. 186 THINK TANK 20: Growth, Convergence and Income Distribution: The Road from the Brisbane G-20 Summt given growth rate of labor productivity. Recent re- more slowly, thus further increasing the ratio. If search (Hall, 2014) has shown that about half of current policies remain the same, debt/GDP ratio the 2007-14 decline in participation is due to the will reach 87 percent by 2024 in contrast to about aging of the population as the baby-boom gen- 70 percent today, and this does not take into ac- eration retires. The other half is due to declining count the apparently intractable pension burdens participation within age groups. Aaronson et al. in some of the largest state and local governments. (2014) have concluded that all of the 2007-2014 decline in the participation rate has been due to For the disposable (after tax) incomes of the bot- secular factors and none to cyclical factors. tom 99 percent, it is hard to find any room for growth at all. Indeed official measures of median The second headwind is education. Throughout wage and household income have been stagnant most of the 20th century rising high school com- for several decades. While these measures may un- pletion rates permanently changed the productive derstate income growth, my exercise in taking the capacity of American workers, but this transition historical record of growth of real GDP per capita was over by 1970. Further increases in high school and then subjecting it to “an exercise in subtrac- completion rates have been offset by dropping out, tion” avoids the problem that some of the median especially of minority students, as the U.S.