Prepare for Weaker Economic Growth, Budget Office SaysBy
For the past three years, economists have been arguing about whether growth—the way we’ve understood it in developed economies—will ever return to the wonder years of the end of the 20th century. This week, cautiously, quietly, the Congressional Budget Office weighed in: Maybe economic growth is slowing for good.
In 2011, Tyler Cowen, who teaches at George Mason University and blogs at Marginal Revolution, argued in a short e-book that developed economies had already picked all the “low-hanging fruit” of rapid growth. Families all had cars and appliances, farm kids had been educated, the available land had been tilled, and the technological innovations of the Internet would not drive growth the way, say, indoor plumbing had.
In 2012, Robert Gordon, an economist at Northwestern University, made a similar argument. The standard model of economic growth, he pointed out, relies on periodic technological innovation to spur faster economic growth than the availability of new babies and capital would predict. There’s no guarantee, says Gordon, that any new technological innovations will show up to match the ones of the 19th and 20th centuries. He, too, points to indoor plumbing as a truly growth-enhancing technology and asks a rhetorical question to prove his point: Which would you rather give up, your iPhone or your toilet?
This year, a cover story in the Economist said that Cowen and Gordon were being too pessimistic. Productivity gains from mobile technology were just getting started, the story argued. Not to mention autonomous cars.
Cowen and Gordon now have an unlikely ally: the Congressional Budget Office. The analysts at the CBO answer to Congress, gaming out what budget proposals will look like. To do this, the office has to rely on certain assumptions about the economy. Blue-sky GDP growth numbers are a favorite in the White House and on Capitol Hill. Assume 6 percent or 8 percent growth in a footnote, and suddenly all those tax cuts and spending proposals meet in a sunshiny glade without deficits. The CBO is supposed to get it right, so it doesn’t go in for blind optimism or untested theory. In its most recent Budget and Economic Outlook for 2012 to 2023, the CBO revises long-term growth projections down a notch. More important, it seems to be leaning slightly toward the end-of-growth crowd, too. From the introduction:
… CBO projects that both actual and potential real GDP will grow at an average rate of 2¼ percent a year between 2019 and 2023. That pace is much slower than the average growth rate of potential GDP since 1950. The main reason is that the growth of the labor force will slow down because of the retirement of the baby boomers and an end to the long-standing increase in women’s participation in the labor force.
The boomers retiring, that’s standard growth theory. Less labor growth means less economic growth. But women’s participation in labor is what Cowen would call a “low-hanging fruit.” American women can enter the workforce only once. When that’s over, it’s over, and it can’t help economic growth any further. According to the CBO, it’s over.