Tuesday, February 18, 2014

Robert Gordon Forecasts Much Lower Rate Of Growth For US Economy In Coming Years

This is an abstract of a NBER paper delivered by Robert Gordon which forecasts a much lower rate of economic growth for the US economy.  Gordon had created quite a stir within the economics profession in a previous paper that argued that the pace of innovation would slow down and limit the rate of economic growth.  He argues, in this paper, that the slower rate of growth in the US is not dependent upon a slowdown in the rate of innovation.  The slowdown started four decades ago.  He points out that labor productivity in the eight decades before 1972 grew at an average rate of 0.8 percent faster than it has in the four decades since 1972.  Consequently, the US economy cannot continue to grow at the real rate of 2 percent as it had grown between 1891 and 1972.

Gordon forecasts a future real growth rate for labor productivity in the total US economy of only 1.3 percent.  That includes a 0.9 percent growth in output per capita and 0.4 percent growth in real income per capita.  Moreover,  the growth in productivity will continue to be unequally distributed.  Half of the growth in income per capita will go the the bottom 99 percent of the income distribution and half will go to the top 1% of the distribution.

Gordon supports his gloomy growth forecast by calling attention to four headwinds that are not subject to controversy:

*  A demographic shift will reduce the number of hours worked per capita.  In addition to the increase in the number of elderly workers leaving the workforce, there will be fewer young people in the workforce.  Jobs have already become scarce for the youth in the US as well as it has been in several other advanced economies.

*  Economic growth in the US prior to 1972 was driven by a rise in educational attainment.  Growth in educational attainment since 1972 has stagnated.  Many other nations have passed the US in high school and college graduation rates.  (Its hard to see how this trend can be reversed as the cost of providing educational services continues to increase faster than the willingness of governments at all levels to fund educational services.)

*  Nothing will happen to reduce the growth in income inequality.  Real income growth for the bottom 99% will grow at half the rate of real income growth to top 1%.

*  The increase in the ratio of debt to GDP will continue to grow at all levels of government.  This will lead to higher taxes and/or slower growth in transfer payments during the next decades.  (Slower growth in transfer payments combined with slower growth in disposable income for the bottom 99% is bound to have an impact on growth in aggregate demand)

Gordon's gloomy forecast will not settle well with economists who believe that the "natural" growth rate of the economy is 2 percent and that it is only subject to moderate fluctuations in the business cycle.  Many conservative economists believe that the natural growth rate is only negatively affected by shocks that occur outside of the "real economy" (They often put the blame on government policies).  Most liberal economists believe that monetary policy and fiscal policy can moderate the fluctuations in the business cycle.  The structural problems in the economy suggested by Gordon's analysis imply that efforts to moderate the business cycle will not affect the potential output of the economy.

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