Call it the New Normal or Great Stagnation, but there’s plenty of concern that America’s weak 2000s growth rate — before and after the Great Recession and Financial Crisis — is a harbinger of anemic growth to come. And GDP has indeed been weak, just 1.9% annually since 1999 vs. 3.6% from 1948-99.
Yet if you look at GDP growth on a per capita basis and compare it to America’s longer-term growth trend, it doesn’t look nearly so dire, as NYU economist William Easterly points in a tweet — “That horribly traumatic Growth Slowdown in the US may not actually exist” — highlighting this chart from Stanford economist Charles Jones:
Jones from his paper, “The Facts of Economic Growth”:
For nearly 150 years, GDP per person in the U.S. economy has grown at a remarkably steady average rate of around 2 percent per year. Starting at around $3,000 in 1870, per capita GDP rose to more than $50,000 by 2014, a nearly 17-fold increase. Beyond the large, sustained growth in living standards, several other features of this graph stand out. One is the signiﬁcant decline in income associated with the Great Depression. However, to me this decline stands out most for how anomalous it is. Many of the other recessions barely make an impression on the eye: over long periods of time, economic growth swamps economic ﬂuctuations. Moreover, despite the singular severity of the Great Depression — GDP per person fell by nearly 20 percent in just four years — it is equally remarkable that the Great Depression was temporary. By 1939, the economy is already passing its previous peak and the macroeconomic story a decade later is once again one of sustained, almost relentless, economic growth.
But is 2%-ish what we can expect in the future? Given (a) demographic trends affecting the labor force and (b) the assumption that productivity will maybe return to its post-1960s average but no better, what might we expect? Here is John Fernald, chief economist of the SF Fed, in a paper out last week:
What is the sustainable pace of GDP growth in the United States? A plausible point forecast is that GDP per capita will rise well under 1 percent per year in the longer run, with overall GDP growth of a little over 1-1/2 percent. The main drivers of slow growth are educational attainment and demographics. First, rising educational attainment will add less to productivity growth than it did historically. Second, because of the aging (and retirements) of baby boomers, employment will rise more slowly than population (which, in turn, is projected to rise slowly relative to history). This modest growth forecast assumes that productivity growth is relatively “normal,” if modest—in line with its pace for most of the period since 1973. … Once the economy recovers fully from cyclical dynamics associated with the Great Recession, GDP growth is likely to be well below historical norms, plausibly in the range of 1½ to 1¾ percent per year. Looking, say, 7 to 10 years out, my preferred point estimate is 1.6 percent growth in GDP per year, with per capita growth of under 0.9 percent. The reason for the slow pace is not primarily productivity, in that we’ve previously seen long periods (such as 1973-95) with modest productivity growth. Rather, it’s the combination of modest productivity growth with demographics.
How might per capita GDP growth that low feel (assuming past patterns of income distribution hold)? Well, during the Not-So-Great Recovery since 2009, per capita GDP growth has been about 1.4%. So, yeah. Better try and boost productivity. Indeed, Fernald cites as an “upside risk” that we “see another burst of information-technology-induced productivity growth similar to what we saw from 1995 to 2004.”
Also: “Raising growth above this modest pace depends primarily on whether the private sector can find new and improved ways of doing business.”