econcrit: Long-term economic decline

Tuesday, February 15, 2022

Long-term economic decline

Fernando M. Martin, Assistant Vice President at the Federal Reserve Bank of St. Louis, in Why Does Economic Growth Keep Slowing Down? (2017) wrote:

Long-run growth rates were high until the mid-1970s. Then, they quickly declined and leveled off at around 3 percent per year for the following three decades.

Exactly: Economic growth was high until the mid-1970s. And Fernando Martin is not the only one who says so. I still remember Scott Sumner, in 2010, saying "growth in US living standards slowed after 1973". So there are at least two economists on the internet who are aware of the economic vigor we lost in the mid-1970s, and the slower economy since that time. At least two.

It's funny, though: Fernando Martin also says

Real GDP has averaged 2.1 percent growth per year since the end of the [2009] recession, which is significantly smaller than the average over the postwar period (about 3 percent per year).

As if he forgot the early period, when growth was high.

All told, there were three distinct periods: 1947-1973, 1973-2009, and 2009-2021. First high growth, then 3% growth, and recently 2% growth. For "high" growth, say 4%, or 1% more than we got in the middle period.

During that middle period Newt Gingrich, writing in 1995 in To Renew America, said "a 1 percent increase in our economic growth rate" would

"shrink the federal deficit by $640 billion over the next seven years"
would "increase federal tax revenues by $716 billion without a tax increase"
"each and every adult citizen would earn $9,600 more", and
"the Social Security Trust Fund never runs out of money".

Gingrich was yearning for the 4% growth we had before the mid-70s.

Most economists, it seems, have given up on ever getting high growth again. You never hear them talk about it -- even though growth was that good in the latter 1990s. Instead, in this millennium, in the recent days of 2% growth, they yearn for 3%. They act like 3% is the best we can do.

In comments at Historinhas a decade back, Marcus Nunes told me that real GDP growth averaged "about 3.3% from the early 50s to 2007." More recently, Google Search turned up the statement

GDP Growth Rate in the United States averaged 3.21 percent from 1947 until 2017

from TradingEconomics, but that statement was already gone by the time I went looking for it. Likewise, Marcus, a decade back, said

"It´s more or less recognized that US RGDP is trend stationary"

but quickly added "maybe that´s changed now!" I think he was right, it has changed, because I don't find recent statements of the average growth rate of real GDP. Maybe the slowing from "about 3%" to "about 2%" made economists rethink the idea of "trend stationary" growth. But where are the economists who were rethinking that idea in the 1970s, when "about 4%" growth slowed to "about 3%"?

Were they drowned out by those saying 3% is all we can hope for? Maybe. But Newt Gingrich and me, we somehow missed that message.

A couple years ago I got tired of reading that 2% growth is good growth, so I googled it.

The featured snippet said
Most economists generally peg good economic growth in the 2 percent to 4 percent range of GDP, with the historical average around 2.5 percent annually.
They left off the dates and reduced the average from "about 3%".
The Balance said: "Many economists place the ideal GDP growth rate at between 2%-3%."
Marketplace said: "A healthy GDP rate would be about 2 to 3 percent..."
But TradingEconomics, when I looked in 2020, said:
The United States is the world’s largest economy. Yet, in the last two decades, like in the case of many other developed nations, its growth rates have been decreasing. If in the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.

Now the picture is coming into focus. Growth was higher in the early years. The average rate of GDP growth has been declining.

Even in the 1950s the decline of growth was evident:

Graph #N: Annual Growth Rates, Real GDP 1940-1970

When the morning weather gives you the forecast for the upcoming week, they report the expected high for each day. Looking at the high points of real GDP growth is like that: The economy was hot in the '50s, but it was cooling down.

Annual growth was above 15% for 1941-43 when World War Two spending was at a peak. The post-war recession, which bottomed out in 1946, was severe. But as the dashed line shows, the lows of the next three recessions were only a little below zero, all three of them. To my eye, the "post war adjustment" (noted by Marcus Nunes) was complete by the time of the 1949 recession.

The graph suggests that the adjustment was still in progress at the time of the 1948 peak (below 5%), but by the 1950 peak again (to my eye) the adjustment was certainly complete.

During the 1960s, economic growth went above the trend of peaks because the absence of recession allowed growth to continue and to rise above trend. In the 1970s, with the inflation, policy went back to creating a recession every few years to cool things down. As a result, growth in the '70s slowed, as it had in the '50s.

The long-term decline of economic growth is clearly visible

For the United States, it is also visible

in the slowing of employment growth
in the decline of capacity utilization
in the decline of Potential GDP

Potential GDP -- I think of it as "best case" GDP -- is in decline. The best we can do, is getting worse. But that isn't the worst part. GDP is doing even worse than Potential GDP.

Things are so bad that people -- economists -- are now calling the slowdown a "success". As if slow growth was the plan all along.