The Growth Rate Again!



Paul Krugman’s article in the editorial section of today’s New York Times begins to cast doubt on the all-too-frequently heard exaggerated estimates of a future economic growth rate in this country of 3.5 percent—but not sufficiently, in our opinion.

By PAUL KRUGMAN for the New York Times, Feb. 21, 2017

. . . The Trump team is apparently projecting growth at between 3 and 3.5 percent for a decade. This wouldn’t be unprecedented: the U.S. economy grew at a 3.4 percent rate during the Reagan years, 3.7 percent under Bill Clinton. But a repeat performance is unlikely.

For one thing, in the Reagan years baby boomers were still entering the work force. Now they’re on their way out, and the rise in the working-age population has slowed to a crawl. This demographic shift alone should, other things being equal, subtract around a percentage point from U.S. growth.

Furthermore, both Reagan and Clinton inherited depressed economies, with unemployment well over 7 percent. This meant that there was a lot of economic slack, allowing rapid growth as the unemployed went back to work. Today, by contrast, unemployment is under 5 percent, and other indicators suggest an economy close to full employment. This leaves much less scope for rapid growth. . . .

As I said, belief that tax cuts and deregulation will reliably produce awesome growth isn’t unique to the Trump-Putin administration. We heard the same thing from Jeb Bush (who?); we hear it from congressional Republicans like Paul Ryan. The question is why. After all, there is nothing — nothing at all — in the historical record to justify this arrogance.

Yes, Reagan presided over pretty fast growth. But Bill Clinton, who raised taxes on the rich, amid confident predictions from the right that this would cause an economic disaster, presided over even faster growth. President Obama presided over much more rapid private-sector job growth than George W. Bush, even if you leave out the 2008 collapse. Furthermore, two Obama policies that the right totally hated – the 2013 hike in tax rates on the rich, and the 2014 implementation of the Affordable Care Act – produced no slowdown at all in job creation.


Now let us take a look at Thomas Piketty’s  Capital in the Twenty-First Century. Piketty  made a  global study of growth rates reaching back to the eighteenth century and he sees no reason to believe future growth rates in the United States will ever rise much above 1.5 percent in the future .

From Capital in the Twenty-First Century by Thomas Piketty,  pp.93-94: “The End of Growth”

Now to consider the future. Will the spectacular increase in per capita output I have just described inexorably slow in the twenty-first century? Are we headed toward the end of growth for technological or ecological reasons, or perhaps both at once?. . .

At the global level, the average rate of growth of per capita output was 0.8 percent per year from 1700 to 2012, or 0.1 in the period 1700-1820, 0.9 percent in 1820-1913, and 1.6 percent in 1913-2012. . .

In Europe, per capita output grew at a rate of 1.0 percent 1820-1913 and 1.9 percent 1913-2012. In America growth reached 1.5 percent: 1820-1913 and 1.5 percent 1913-2012.

The details are unimportant. The key point is that there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time. If we look at the last few decades, we find even lower growth rates in the wealthiest countries: between 1990 and 2012, per capita output grew at a rate of 1.6 percent in Western Europe, 1.4 percent in North America, and 0.7 percent in Japan. It is important to bear this in mind as I proceed, because many people think that growth ought to be at least 3 to 4 percent per year. As noted, both history and logic show this to be illusory


This chart from Piketty’s book clearly indicates that growth rates much above 1.5 percent have been extremely rare in world economic history and only for brief periods (e.g., Europe 1950-1970)  and under extraordinary circumstances. They are not the norm and will not be repeated in our lifetime.

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