The Expectation of Growth (part one)

Despite the vagaries of the business cycle, unexpected periods of recessions, a civil war, two world wars, a Great Depression, etc., there's one thing we can always count on in the long-run: 2% real growth in per-capita GDP

- Mark J. Perry

The wife and I were bingeing season seven of Game of Thrones again, before the release of season eight. "I'd very much like to believe that Jon Snow is wrong," Tyrion says. "But a wise man once said that you should never believe a thing simply because you want to believe it."

Yup. And I very much want to believe that Mark J Perry is right. But wanting to believe is not a reason to believe. It is a reason to doubt.

Trust your judgement, not your dreams.


Earlier this year, Timothy Taylor brought up Keynes, back in 1930, writing of the standard of living we might achieve by 2030. ("Between four and eight times as high as it is to-day", Keynes wrote. This "assumes only an average annual growth rate of 1.5-2.0% per year", Taylor said.)

Then Taylor mentioned Thomas Macaulay, writing in 1830 about the prosperity we might achieve by 1930:

Perhaps the best-known passage from the essay is Macaulay's comment: "We know of no country which, at the end of fifty years of peace and tolerably good government, has been less prosperous than at the beginning of that period."

No country grows less prosperous, Macauley says. But Macauley lived in a time that Keynes called "the greatest age of the inducement to investment". Ours, by contrast, is not the greatest age; we can and do grow less prosperous. From The Sounding Line:

In Brief: US Wages Finally Get back to Where They Were in 1973

Submitted by Taps Coogan on the 19th of April 2019 to The Sounding Line.

According to the U.S. Bureau of Labor Statistics, inflation adjusted average wages for production and non-supervisory workers for March came in at $23.24 per hour. That is down ever so slightly from February (-0.2%), which was an all-time high.

Unfortunately however, $23.24 per hour is exactly how much the average worker would have made in February 1973 (in inflation adjusted terms). In other words, only in the last few months have US hourly production wages returned to the levels they set 46 years ago.

Fifty years, give or take.

Taylor continues:

But the passage of most interest to me here is when Macauley looks back more than a century to 1720, and also ahead 100 years from 1830 to 1930--when Keynes was writing. Macauley wrote:

"Hence it is that, though in every age everybody knows that up to his own time progressive improvement has been taking place, nobody seems to reckon on any improvement during the next generation. We cannot absolutely prove that those are in error who tell us that society has reached a turning point, that we have seen our best days. But so said all who came before us, and with just as much apparent reason. ... On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"

I've raised this theme often enough in discussions. Yes, maybe economic progress is about to stop and reverse itself. Maybe we will be immiserated by new technology. Maybe the future is one of mass starvation from overpopulation. But looking back at the historical experience of the last several hundred years, what can be the basis for having any confidence in such pessimistic claims?

I use the cycle of civilization as a tool for understanding the world. I'd say those who express "such pessimistic claims" may be looking back at the rise of civilization, and forward at its decline. Civilizations do decline, you know.

That doesn't mean our civilization is declining, of course. It just means it could be. So rather than asking "What principle is it" or "What basis can there be", the question I'd ask is: Are we at a "turning point"? If we are, Taylor and Macauley's questions are answered.

"A cycle," Ray Dalio says, "is nothing more than a logical sequence of events leading to a repetitious pattern." The rise and decline of civilizations meets this criteria.

Timothy Taylor says okay, maybe our best days are behind us, but all the evidence shows nothing but improvement. And you know, maybe Taylor is right. Maybe "nothing but improvement" will continue into our future. On the other hand, "nothing but improvement" is pretty much how it would look all through the "rising" side of the cycle of civilization and right up to the turning point at the peak. After the peak, it's a different story.

Don't get me wrong. I'm not marching around carrying a sign that says "The End Is Near". I'm just saying that if you want to think about life or human progress, you may find the cycle of civilization a useful tool for explaining facts and organizing thoughts.

I also have to point out that if your evidence is "there is nothing but improvement behind us", then your evidence may be evidence of a cycle of civilization.


As John Maynard Keynes pointed out, people often rely on the assumption that "the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change." So it is not surprising that people expect economic growth in the future to continue much as it has in the past. (Also, people want to believe growth will continue. But you heard Tyrion.)

When you figure growth at a constant rate, you get a curve that goes uphill faster and faster all the time. Like the dashed line on this graph:

Graph #1 from Mark J. Perry at Carpe Diem, 2009

"Exponential growth", it is called. Many people would tell you that exponential growth cannot continue because of resource constraints. If we take such claims as true -- and it's hard not to -- then we are saying future growth (now or at some point in the future) must slow down.

Or, at some point in the past. Actually, economic growth has been slowing for some time already. But I do not mean to assume that this is (or isn't) because of resource constraints. If we assume that growth must slow down, then no further explanation is needed to account for the slowdown of economic growth. I don't want to do that. I don't want to assume an answer to the question of slowing growth.

I want to think about the questions posed by Timothy Taylor and Thomas Macaulay:

• "Yes, maybe economic progress is about to stop and reverse itself. Maybe we will be immiserated by new technology. Maybe the future is one of mass starvation from overpopulation. But looking back at the historical experience of the last several hundred years, what can be the basis for having any confidence in such pessimistic claims?"
• "On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"

I want to think about my answer to those questions.

If you take a graph like #1 above, but make the vertical scale a "log scale" (or if you take the log of the values) the exponential trend (on Graph #1, the dashed line) becomes a straight line:

Graph #2 from Mark J. Perry at Seeking Alpha, 2010

Maybe this is where the idea to show straight-line trends comes from: A constant rate of growth, logged, appears on a graph as a straight line. And in this case the straight line tells Mark J Perry that "there's one thing we can always count on in the long-run: 2% real growth in per-capita GDP".

The straight line on Graph #2, the red line, shows a constant rate of growth: 2.0% per year, Perry says. If economic growth continues at the same trend rate after 2009, the straight red line will continue up and to the right with exactly the same slope as in the 1809-2009 period.

If trend growth slows, there will be a change in the red line where the slowdown occurs. After the change, the red line may again be straight, but the slope of the line will be less steep. (If trend growth is faster, the slope will be more steep.)

The above graphs were created in the early years after the Global Financial Crisis and the Great Recession, back when economists still thought growth always "returns to trend" after recessions. Likewise this graph, from Mark Thoma:

Graph #3 from Mark Thoma at Economist's View, 2011

You will notice that on this graph the red trend line is straight, but not perfectly straight. Not sure what the calculation for that line is; maybe it's a Hodrick-Prescott with a high smoothing factor. It's not exponential.

On Graph #2 the trend line is perfectly straight: Perry assumed growth was exponential, and logged the values, so his trend line is perfectly straight. But even without making the assumption of exponential growth, Thoma got a trend line straight enough to suggest that growth will continue in the future along the same general path. It gave him the confidence to say "I am confident that we'll return to trend this time as well".

Noah Smith commented on Mark Thoma's thoughts:

The idea is that because this graph sort of looks like a straight line (although if you look closely, you'll see that it's not!), that it will continue to look sort of like a straight line into the future.

But off the top of my head, I can think of no good reason to think that this is true. The kinda-sorta stability of the long-term U.S. GDP growth rate is not a law of the Universe, like conservation of momentum, which is (we hope) fixed and immutable. It is a past statistical regularity whose underlying processes we don't fully understand. There may be solid, long-term factors that will keep our growth at this "trend," or there may not.

Maybe, Noah says, but maybe not.


In 2010 Mark J Perry was saying "we can always count on" 2% real growth in per-capita GDP. In 2011 Mark Thoma was saying: "I am confident that we'll return to trend". In those years, people expected the economy to return to trend.

Yet already in 2011, Noah Smith was saying:

Even if the U.S. returns to its "trend" growth rate of 2 or 3 percent, there seems to me to be no good reason to believe that it will return to its trend level.

In 2012, James Bullard was broaching the idea that the economy's performance showed that it was not going to return to trend. The trend has changed, Bullard said:

"A better interpretation of the behavior of U.S. real GDP over the last five years may be that the economy was disrupted by a permanent, one-time shock to wealth."

Also in 2012, Marcus Nunes noticed a change: "It´s more or less recognized that US RGDP is trend stationary (maybe that´s changed now!)", he wrote. Now, seven years later, I'm willing to say that economists' thinking has definitely changed. What was it Keynes supposedly said? "When the facts change I change my mind. What do you do?"

In September 2016, an article at VOX pinpointed the reason for the change in thinking:

The typical post-WWII recession has a distinct trough, followed by a sharp rebound toward a stable trend line. Following the Great Recession, however, this rebound is missing.

(Marcus Nunes turned up that link.)

As Marcus described it back in 2012, the US Real GDP trend growth rate was "about 3.3% from the early 50s to 2007". These days, the people who predict growth prefer to predict low growth. In the last five years you don't find anybody making predictions of growth above 2.3%. The trend of growth, or at least the expectation of growth, has definitely changed.

Here's the thing: Marcus was thinking in terms of one single trend growth rate for the whole 55 years ending in 2007, and said the consensus among economists was that the economy is "trend stationary". What's weird about all this is that none of those economists seems to remember the previous slowdown, the one after 1973. Let me jog your memory:

• 23 May 2010, Scott Sumner: America’s amazing success since 1980
  

  I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

  Sumner provided two important bits of data: the date the slowdown started, and an evaluation ("it would have slowed more...").
  
  
• 26 October 2014, Gavyn Davies: Is economic growth permanently lower?
  

  Three of my colleagues at Fulcrum have been examining the behaviour of long run GDP growth in the advanced economies, using developments of dynamic factor models to produce real time estimates of long run GDP growth rates. See the summary paper here by Juan Antolin-Diaz, Thomas Drechsel and Ivan Petrella, and the more academic version here [1].
  
  The results (Graph 1) show an extremely persistent slowdown in long run growth rates since the 1970s, not a sudden decline after 2008. This looks more persistent for the G7 as a whole than it does for individual countries, where there is more variation in the pattern through time.
  
  Averaged across the G7, the slowdown can be traced to trend declines in both population growth and (especially) labour productivity growth, which together have resulted in a halving in long run GDP growth from over 4 per cent in 1970 to 2 per cent now.

  (Unfortunately, the links don't work, and there is no graph to see.)
  
  
• 1992 Presidential campaign, Ross Perot in his book United We Stand, this graph:
  
  
  
  
  Again, the slowdown in growth occurred around 1973.
  
  

If the 1952-2007 growth average is 3.3%, and there was a slowdown around 1973, then trend growth must have been more than 3.3% before 1973, and less than 3.3% after. No one acknowledges this. Economists talk about low volatility and low productivity, but don't mention slow GDP growth.

Everyone is now so certain the 2007-2008 slowdown was "permanent" that instead of 3% growth they now predict 2%. But none of em seem to remember the slowdown from 4% to 3% that occurred around 1973.