The Price Americans Pay for Slow Growth
Is slow economic growth here to stay? Writing in the Wall Street Journal, Ben Leubsdorf reports that this may be the case:
Most Federal Reserve policy makers and private forecasters are...predicting little change in 2016 and beyond: an economy growing a little faster than 2%...Gross domestic product has expanded at an inflation-adjusted annual pace of 2.2% since the recession ended in mid-2009, far below its 3.6% average during the second half of the 20th century, according to Commerce Department data.
Actually, the U.S. growth slowdown is far less dramatic than these numbers would seem to indicate, because they are not adjusted for population. Once we do that, we find that real GDP per capita rose at a 2.2 percent annualized rate between 1947 and 2000, and at a 1.4 percent rate since the end of the recession. Slower population growth, therefore, accounts for almost half of the growth slowdown.
That said, a 0.8 percentage point slowdown in per capita GDP growth is no laughing matter. An economy expanding at 2.2 percent will double about once every 33 years, while an economy growing at only 1.4 percent will take 51 years to double. (If you want to do these calculations yourself, just use the handy “rule of 72.” The number of years something takes to double in size is approximately equal to the number 72 divided by the growth rate!)
Here’s what that looks like when we project per capita GDP out to the year 2050:
With the growth rate the U.S. enjoyed in the late 20th century, the country would be about one-third richer by 2050, on average, than with the growth rate we’re experiencing now. That’s a substantial difference.
To raise the per capita growth rate, policy makers can do a number of things. They can decide to let in a lot more high-skilled immigrants, who will tend to make more money than the average American, and who will then increase demand for products provided by the rest of the workforce. Government can invest more in research and development, leading to new technologies that boost incomes. Government can build more infrastructure, since the U.S.'s is in poor repair. Policy makers can try to identify regulations that are holding back the private sector, and scale these back or eliminate them. The inefficient corporate taxes can be replaced with less distortionary income and property taxes.
Most of these policies (with the exception of high-skilled immigration, and possibly research spending) will give the economy only a temporary boost to growth, but together they might be enough to bring the U.S. back to the 2.2 percent level through 2050.
But growth isn’t the only thing that matters in an economy. Distribution matters too. All this time, I’ve been talking about per capita GDP, but a better measure of the typical person’s standard of living is median income -- or the amount that splits the income distribution into two equal halfs. When inequality increases, the median increases more slowly than the average, because more of the increase is going to the people at the top of the distribution.
This has, in fact, been happening. Real median household income in the U.S. has been falling since the late 1990s, and is now down to around where it was in the late 1980s. Part of that is due to shrinking household size -- fewer people living together in the same house. Part is due to population aging. Part is a composition effect, due to the large amount of low-skilled immigration in the 1990s and 2000s. And part is due to the tremendous increase in medical costs, which means that more of workers’ compensation had to be paid in the form of health benefits rather than income. Once we account for these factors, median income has probably been little changed for the past 15 years or so.
But this isn't good. Even though new technology has raised living standards more than the income numbers might suggest, stagnant income for the typical American is still a reason for worry. To increase prosperity for the vast majority of Americans, the U.S. doesn’t just need growth -- it needs a way to funnel that growth to the masses instead of just to the people at the top. That may prove to be an even trickier task than boosting growth itself.
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