What is the New Normal for U.S. Growth?

In his article, “What Is the New Normal for U.S. Growth,” John Fernald argues that the United States could plausibly see a decline in average GDP growth to a range of 1.5-1.75%, which is well below historic growth rates. He examines trends in demographics, education, and productivity to determine inputs into his calculation of expected GDP growth rate, in which GDP growth = growth in worker hours + GDP per hour. He uses the labor force growth rate, especially in relation to the overall population growth rate, to determine the growth in worker hours. Labor force growth is expected to be low due to a consistently low overall population growth rate as well as the aging of baby boomers so that they retire and leave the work force. The Congressional Budget Office predicted the labor force growth rate to be .5% per year for the next decade, so Fernald translates this to project a .5% per year growth in worker hours. To determine GDP per hour, Fernald examines past fluctuations in productivity growth. He argues that productivity growth cycles between strong and weak, or normal, periods, and thus compares the U.S.’s current low productivity growth rate to that of the last era of low productivity growth (1973-1995). If the U.S. returns to its 1973-95 pace, then GDP growth would be about 1.75%. However, Fernald also argues that it is very possible for productivity growth to be less than that of 1973-95 because educational attainment has plateaued and thus education does not contribute as much to productivity growth as it would have in the past. With this scenario, Fernald calculates GDP growth to be closer to 1.5%.

Fernald then argues that the primary reason for this relatively low expected GDP growth rate is demographics, and that a workers hours growth rate of .5% would have made growth in the 1973-95 period just as slow as the current rate. He then acknowledges that due to uncertainty about future productivity, it is very possible that his predicted rate of GDP growth underestimates actual growth, particularly if there is a new wave of productivity-improving technology as was the case during past productivity booms. Despite this possible inaccuracy, Fernald’s estimated GDP growth rate has strong implications for future economic conditions and possible policy changes. People can expect slower growth in wages, sales, and tax revenue, as well as lower interest rates. However, Fernald also argues that it is possible to improve productivity and thus improve these rates by encouraging innovation, improving infrastructure, and providing better (and possibly cheaper) education.

While this is an interesting argument, it is very oversimplified, especially when examining the role productivity plays in his equation for the GDP growth rate. He fails to discuss the effect of productivity growth, particularly technological innovation, on the growth rate of worker hours, as technology advances that replace workers’ jobs or make them more efficient could lead to a slower rate of worker hours growth. However, this improved technology taking the place of workers does not necessarily lead to slower GDP growth, as the work is still getting done. In this case, he would have underestimated the GDP growth rate. Therefore, I think he should restructure his equation for GDP growth to include a more nuanced interpretation of productivity, as well as change his argument so that demographic is not the sole determinant of the growth in worker hours.

8 comments to What is the New Normal for U.S. Growth?

  • 1. As per class, one thing to keep in mind is that this is not an analysis of growth in the next quarter or even over the next two years. It is rather an implicit long-run framework.

    2. In class we talked about the education “production function,” how it can add value to an economy. So … human capital, socialization, signaling, sorting. How have these components of the function changed over time? Are there ways to enhance their operation? One example might be improving education’s “diligence” signal by mandating more shitwork content (pardon my French, as it were, given that it’s an Old English term).

    3. Can we do anything to enhance labor force growth? If we could, would we want to?

    4. Katy’s bottom line is that we need to explore “productivity” in greater detail. Hence our next few readings! We need more background on what contributes to productivity. We also need to actually define it, too, don’t we?!

  • ghimirer17

    I completely agree with Katy that we need to explore productivity in greater detail, especially in regards to technology. While including technological innovations into the equation would certainly be more accurate, I question how we can forecast these innovations into the future? I’m not too experienced with predicting how different technologies will develop, and how that in turn will affect economic growth – it seems more abstract to me rather than some concrete that can be specified? For example, did economists realize how fast or slow the development of the modern laptop would come into the market? I guess my main question is: how do we estimate not only the timing of certain technological innovations (also how do we predict what the technological innovation will be), but also the impact that it could have on the economy? I assume one can look at past periods of different innovations and try to anticipate the impact from what we know has happened in the past – i guess it just seems less feasible to me because I am not familiar with this subject.

  • Coming next week: how to model the (long-run) roll of productivity.

  • On behalf of David:
    Finding a solution to achieving consistent long-term growth has been an issue that economists have grappled with for centuries. I certainly agree that an aging population, shrinking work force, and plateauing educational achievement are reasons to underestimate long-term national growth. I also agree with the importance of technological innovation as a key driver in this growth. If we consider the Solow Steady State model, a shift in the technology curve will redefine the growth trajectory altogether. However, Rachana is definitely correct in noting that we cannot predict when technological advancements will occur in the future. We can always subsidize R&D, but it seems that technology is little more than a wildcard. Although this is true, there are other factors which contribute to output growth. For example, health and income, as I have learned from Professor Casey’s Development Economics course, have dual endogeneity. A public investment in healthcare could be something that increases the output of the labor force. People cannot work if they are sick. However, trade liberalization can have the end effect of increasing long-term output as well. Tax cuts can also encourage borrowing and investment. The idea is that policy which promotes long-term growth can vary from country to country, often depending on preexisting unique institutions. Can a universal solution to this problem even exist?

  • cohend17

    Finding a solution to achieving consistent long-term growth has been an issue that economists have grappled with for centuries. I certainly agree that an aging population, shrinking work force, and plateauing educational achievement are reasons to underestimate long-term national growth. I also agree with the importance of technological innovation as a key driver in this growth. If we consider the Solow Steady State model, a shift in the technology curve will redefine the growth trajectory altogether. However, Rachana is definitely correct in noting that we cannot predict when technological advancements will occur in the future. We can always subsidize R&D, but it seems that technology is little more than a wildcard. Although this is true, there are other factors which contribute to output growth. For example, health and income, as I have learned from Professor Casey’s Development Economics course, have dual endogeneity. A public investment in healthcare could be something that increases the output of the labor force. People cannot work if they are sick. However, trade liberalization can have the end effect of increasing long-term output as well. Tax cuts can also encourage borrowing and investment. The idea is that policy which promotes long-term growth can vary from country to country, often depending on preexisting unique institutions. Can a universal solution to this problem even exist?

  • wedmonds

    Though I understand his argument, I, too, am skeptical of its predictive power. My biggest question now is the plateau of educational attainment. I anticipate technology will continue to fuel education in developing countries, making it accessible to more and more of the world every year. Where I really anticipate education to progress, however, is with the elderly. As the elderly will come to account for the largest population group by age distribution, I anticipate the education system will evolve, targeting not only the young, but older generations as well. Programs to teach technology and increase productivity for the elderly might be appealing to the baby boomer’s generation, which would fuel educational attainment above its current plateau.

  • We need to be careful in assuming that R&D and innovation leads to systematically higher productivity. Are we not facing diminishing returns? Communications / logistics / electricity & energy / basic business tools are all pretty advanced, and we’re not seeing improvements leading to more work done by the same person for the economy as a whole.

  • santanagarcesk17

    With the new deep learning computers and other technology changes focused on making human capital unnecessary, I wonder whether productivity itself will become obsolete. If we are facing diminishing returns, and new technology is only created to make our lives more leisurely will we nave a need for productivity? The only places that won’t see diminishing returns will be in developing countries who have not yet adopted the technology that we take for granted. As long term growth slows down, we have no idea what the next measures of productivity will be.

Germane comments welcome! – others treated as spam.