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.