The guaranteed growth assumption made by economists

“After 7 Years of Slow Growth, U.S. Now Sees More of Same” is a WSJ article on how the U.S. economy refuses to grow much faster than the population growth rate (i.e., it barely grows on a per-capita, inflation-adjusted basis).

Since 2009 I have been having an intermittent argument with a friend’s relative, a Nobel Prize-winning economist. His assumption is that growth was and is the natural condition of an economy in general, as people figure out new and better ways to do things, and that growth was and is the natural condition of the U.S. economy.

My argument was that an economy with a large percentage of GDP spent by the government could stagnate given sufficiently inefficient execution of centrally planned activities, such as road-building. Casey Mulligan, the University of Chicago economist, weighed in with the argument that if you pay Americans on condition that they not work, a lot of them will not work (see “Book Review: The Redistribution Recession“).

Based on the WSJ analysis, it seems that my friend’s relative is more typical of mainstream economists. They have consistently over-predicted growth for the U.S. economy. What can we learn from this? Maybe as investors not to believe these kinds of predictions!

8 thoughts on “The guaranteed growth assumption made by economists

  1. “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”

  2. Ever check out the Do the Math blog? See the list of popular posts on the right sidebar.
    http://physics.ucsd.edu/do-the-math/

    A favorite is “Galactic Scale Energy.” US energy production has grown consistently throughout its history, until recently…

    To the point of your post, “Exponential Economist Meets Finite Physicist” is relevant. Couple this with the work of James Hamilton concerning energy prices and economic growth:
    http://econweb.ucsd.edu/~jhamilto/
    http://econweb.ucsd.edu/~jhamilto/handbook_climate.pdf

    Economic growth seems inextricably linked to energy production *growth*, among other things. This growth has slowed noticeably since 1980. “Peak” oil is probably wrong, “plateau” oil may be closer to the mark. The US has spent money as if the economy of each succeeding generation would be so much larger than the previous that paying off the previous generation’s debt would be a small burden. This may no longer be the case. It will be interesting to see what effect US-produced oil and low oil prices have on near-term growth. And if, as you suggest, regulation has become so burdensome that it offsets other factors which have previously driven growth, such as low energy prices.

  3. For a given population, knowledge level, existing prior investments, and natural resource prices, one would expect there should be an equilibrium level of economic activities. If the economic activity level is higher than equilibrium for some reason, I would expect the natural course of the economy is to shrink to a sustainable level.

    The problem is to quantify my hypothesized 4 predictors, and make a model. The creation of an experimental model would require dictatorial powers.

    In the proposed 4 predictors above, government consumption and regulation is part of the “population” predictor, and should affect equilibrium amount of economic activity.

    As a non economist, I have very naive ideas about value, if spending a day at the shopping mall, and finishing with a dinner and a movie, I could add $500 to the GDP. If I spent the same day with 50% of the time watching a free online class, 50% of the time solving HW problems, I add nothing to the GDP, except the food and other groceries I consumed at home.

    As a non economist, I feel satisfied that GDP growth is a flaky goal, as the integral (over time) of the GDP does not represent the accumulation of productive capital, which is what drives living standard.

  4. This chart ( http://knoema.com/pjeqzh/gdp-per-capita-by-country-1980-2014 ) indicates that US per capita GDP growth averaged since 1980 has been fairly robust (even including the recent low growth years) and this chart ( http://www.usgovernmentspending.com/spending_chart_1980_2015USp_17s2li111mcn_F0xF0fF0sF0l_Recent_Total_Spending_In_Percent_GDP ) indicates that total US government spending as a % of GDP is more or less back to the average since 1980. If we have indeed switched from a moderate to low growth regime, I’m not convinced that government spending alone explains the change.

  5. Another hypothesis: another way an economy could stagnate is though population decline. Barring high productivity gains, population growth seems to act as a long-term speed limit on GDP growth. So a declining population, with a productivity rate equal to or less than the rate of population decline, suggests stagnation.

    The post “Demographics and GDP: 2% is the new 4%” over at Calculated Risk blog lays out the evidence (US-based, back to 1950):
    http://www.calculatedriskblog.com/2015/02/demographics-and-gdp-2-is-new-4.html

    I’ve never seen anything formal, but I’ve wondered if Japan’s declining population might be the main driving factor behind its seeming inability to revive its economy.

  6. Eyewall: I don’t think that economic growth through population growth is anything to celebrate. Consider India with 1.25 billion people. If they grew to 2.5 billion people with exactly the same standard of living that would be spectacular GDP growth (2X) but citizens of India probably wouldn’t perceive it as an improvement. Per-capita inflation-adjusted GDP is a more interesting number to me. I think that population growth makes existing citizens worse off in many ways, e.g., due to increased competition for real estate, lives spent sitting in traffic jams, etc.

  7. philg: I think we’re in violent agreement: growth is not the default setting of the economy. I was presenting an alternate hypothesis to why your friend could be wrong, beyond simple government incompetence. I did not intend to celebrate growth through demographic increase.

    Growth independent of demographics is what we’re all after – on a yearly basis, it’s the gap between demographic change and GDP change (aka productivity.) Over time, it definitely needs to be adjusted for inflation (and almost never is).

    Also agree we shouldn’t trust economists and their predictions. Did you know the Nobel Prize in economics was established much later than the death of Alfred Nobel, and was/is paid for by a bank?

    https://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences

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