Thomas Piketty, in his book Capital in the Twenty-First Century, stated categorically that the United States will not within the foreseeable future achieve the 3.5 percent growth rate of the thirty-year period that followed World War II; nor will any of the economically advanced countries—Britain, France, Germany et al. The ideal conditions existing then, which made such growth possible, no longer exist. We have to be satisfied with a 1.5 percent growth rate from now on and should, in fact, consider it appropriate for this stage of our economic development.
Today’s Sunday New York Times contains an article by Ruchir Sharma of Morgan Stanley, presented below in an abridged form, in which he arrives at the same rational conclusion. Both men are equally credible. How much longer must we endure the posturing of analysts and politicians who cannot recognize that the past is past?
By RUCHIR SHARMA Jan. 14, 2017
Mr. Trump’s advisers say that over the next decade, their plans for tax cuts and deregulation could push the average annual growth rate back up to 3.5 percent — the same as during the Reagan presidency. . . . His backers, dismissing skeptics as defeatists, have insisted there is “no law of nature or economics” that would prevent the United States from reviving the boom of the 1980s.
Only there is such a law. The forces that underlie economic growth have weakened significantly since the Reagan years, worldwide. No nation, no matter how exceptional, can try to grow faster than economic forces allow without the risk of provoking a volatile boom-bust cycle.
The potential growth rate of an economy is roughly determined — and limited — by the sum of two factors: population and productivity. An economy can grow steadily only by adding more workers or by increasing output per worker. During the Reagan years, both population and productivity were growing at around 1.7 percent a year, so the potential United States growth rate was close to 3.5 percent.
Luxury cars of the Fifties
In recent years, America’s population and productivity growth have fallen to around .75 percent each, generously measured, so potential economic growth is roughly 1.5 percent, less than half the rate of the Reagan era. Any policy package that aims to push an economy beyond its potential could easily backfire — in the form of higher deficits and inflation.
The population and productivity formula is well known and undisputed — yet widely ignored amid the current euphoria.
In the last 1,000 years, no economy has ever broken free of the limits imposed by population growth. Before the late 19th century, global population growth did not exceed half a percent, and global economic growth did not exceed 1 percent for any sustained period. Before World War II, population growth increased to 1 percent, and economic growth accelerated to about 2 percent. After the war, the baby boom pushed population growth toward 2 percent, and economic growth rose to nearly 4 percent for the first and only time in world history.
Luxury cars today
Now, as families around the world have fewer children, global population growth has fallen to about 1 percent. . . . With the United States population growth rate falling — last year to the slowest rate recorded since the 1930s — it is extremely unlikely that any president could juice the economy to grow at a steady 3.5 percent or more over the next decade.
Slow population growth undermines the economy by delivering fewer young people into the work force. Nations can partly compensate by raising the retirement age or admitting more immigrant workers. Mr. Trump, however, has no such plans. His advisers focus instead on bringing back the many American workers who have given up on finding jobs and dropped out of the labor force. But this strategy can have only limited effect. The main reason fewer workers participate in the nation’s labor force is not that they are discouraged, but that they are over 55, the age when many people stop working or work less.
In general, commentators who believe the United States can go back to the 1980s focus not on population but on productivity. They argue that Reagan-style tax cuts and deregulation can increase investment in new plants and equipment, and substantially raise output per worker. . . .
Let’s assume Mr. Trump’s team can more than double United States productivity growth to the rate achieved in the Reagan era, 1.7 percent. Given the irreversible fact of slowing population growth, that productivity miracle would still raise the potential growth rate of the domestic economy to only around 2.5 percent. If that doesn’t sound so different from 3.5 percent, consider that every percentage point of growth in the domestic economy is worth more than $100 billion — the difference between feeling pretty good and Great Again.
The nub of the problem here is nostalgia for a bygone era. . . . [F]or most countries, the era of population growth is now over.
The pressure of falling population growth means that every class of countries needs to adopt a new math of economic success and bring its definition of strong growth down by a full point or more. For developed nations like the United States, with average incomes over $25,000, any rate above 1.5 percent should be seen as relatively good. . . .
The risks of excessive ambition are real. In recent years the actual growth rate of the United States economy has been about 2 percent, which is disappointing in comparison with the 1980s, but far from horrible, given its diminished potential. Often, if a country pushes the economy to grow much faster than its potential, it will start to suffer from rising debts and deficits. Inflation will rise, forcing the central bank to raise interest rates aggressively, which can prompt a recession. This risk is particularly high at a time, like the present, when the United States is already running the largest deficit ever recorded at this stage of an economic expansion.
It will be difficult to persuade people to accept the reality of slower growth. Voters in many countries are already turning to populists who are promising miracles and attempting nationalist economic experiments. The coming era is likely to bring more such experimentation and diversion,but the new math of slower growth will remain.
About the author: Ruchir Sharma, author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World,” is chief global strategist at Morgan Stanley Investment Management.