Since the financial crisis and recession of 2009, economic growth in the U.S. (as well as many other rich countries) has been slow relative to past history. That slow economic growth is due in large part to slower growth in productivity, and that slower growth in productivity started even before the financial crisis. The materials here discuss how to measure productivity growth, how shifts of resources between sectors or firms help determine productivity growth, and why the slowdown may be a natural conclusion of becoming rich.
- 15 May 2017 Understanding the Cost Disease of Services
- 06 Mar 2017 Profits and Productivity
- 15 Oct 2016 Labor Recovery and the Productivity Slowdown
- 21 Sep 2016 Soooo...maybe the service sector isn't a drag on productivity growth after all?
- 15 Aug 2016 More on Measured Productivity and the Labor Share
- 13 Jun 2016 Is productivity the victim of it's own success?
- 11 May 2016 More on Decomposing US Productivity Growth
- 20 Jan 2016 The Declining Marginal Product of Capital
- 24 Nov 2015 Describing the Decline of Capital per Worker
- 21 Nov 2015 The Changing Composition of Productivity Growth
- 26 Sep 2015 Labor's Share, Profits, and the Productivity Slowdown
- 12 Mar 2015 Forecasting Future Growth
- 07 Mar 2015 Has the Long-run Growth Rate Changed?
- 18 Feb 2015 Significant Changes in GDP Growth
- 10 Feb 2015 Is the U.S. Really Below Potential GDP?
- 17 Dec 2014 Why Did Consumption TFP Stagnate?
- 11 Dec 2014 I Love the Smell of TFP in the Morning
- 09 Oct 2014 The Slowdown in Reallocation in the U.S.
- 23 Sep 2014 Productivity Pessimism from Productivity Optimists
- 16 Sep 2014 Slow Growth in Potential GDP for the U.S.?
- 31 Jul 2014 Economic Dynamism and Productivity Growth
- 02 Jul 2014 Pricing Power and Lower Potential GDP
- 17 Jun 2014 Potential "Potential Output" Levels
- 20 May 2014 Is Robert Gordon Right about U.S. Growth?
- 14 May 2014 Declining U.S. Dynamism?
- Alexander, S. (2017) “Considerations on Cost Disease.” Available at: Link.
- Bernstein, J. (2014) “Where is the Automation in the Productivity Accounts?” Available at: Link.
- Bunker, N. (no date) “The Pace of Productivity Growth and Misallocation in the U.S.” Available at: Link.
- Cassidy, J. (no date) “The Great Productivity Puzzle.” Available at: Link.
- Farmer, R. (no date) “Has labor productivity growth fallen permanently?” Available at: Link.
- Fernald, J. (no date) “What is the New Normal for U.S. Growth?” Available at: Link.
- Lee, T. B. (no date) “With is the Economy Growing so Slowly?” Available at: Link.
- Semuels, A. (no date) “Why Economic Growth is so Lackluster.” Available at: Link.
- Baumol, W. J. and Bowen, W. G. (1965) “On the Performing Arts: The Anatomy of Their Economic Problems,” The American Economic Review. American Economic Association, 55(1/2), pp. 495–502. Available at: Link.
- Baumol, W. J. (2012) The Cost Disease: Why Computers Get Cheaper but Healthcare Doesn’t. New Haven, CT: Yale University Press.
- Baumol, W. J. (1967) “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis,” The American Economic Review. American Economic Association, 57(3), pp. 415–426. Available at: Link.
- Fernald, J. (2014) Productivity and Potential Output Before, During, and After the Great Recession. Working Paper 20248. National Bureau of Economic Research. doi: 10.3386/w20248.
U.S. labor and total-factor productivity growth slowed prior to the Great Recession. The timing rules out explanations that focus on disruptions during or since the recession, and industry and state data rule out "bubble economy" stories related to housing or finance. The slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains. A calibrated growth model suggests trend productivity growth has returned close to its 1973-1995 pace. Slower underlying productivity growth implies less economic slack than recently estimated by the Congressional Budget Office. As of 2013, about ¾ of the shortfall of actual output from (overly optimistic) pre-recession trends reflects a reduction in the level of potential.
- Fernald, J. G. and Jones, C. I. (2014) “The Future of US Economic Growth,” American Economic Review, 104(5), pp. 44–49. Available at: Link.
Modern growth theory suggests that more than three-quarters of growth since 1950 reflects rising educational attainment and research intensity. As these transition dynamics fade, US economic growth is likely to slow at some point. However, the rise of China, India, and other emerging economies may allow another few decades of rapid growth in world researchers. Finally, and more speculatively, the shape of the idea production function introduces a fundamental uncertainty into the future of growth. For example, the possibility that artificial intelligence will allow machines to replace workers to some extent could lead to higher growth in the future.
- Gordon, R. J. (2014) A New Method of Estimating Potential Real GDP Growth: Implications for the Labor Market and the Debt/GDP Ratio. Working Paper 20423. National Bureau of Economic Research. Available at: Link.
Forecasts for the two or three years after mid-2014 have converged on growth rates of real GDP in the range of 3.0 to 3.5 percent, a major stepwise increase from realized growth of 2.1 percent between mid-2009 and mid-2014. However, these forecasts are based on the demand for goods and services. Less attention has been paid to how the accelerated growth of real GDP will be supplied. Will the unemployment rate, which has declined at roughly one percent per year, decline even faster from 6.1 percent in June, 2014 to 3.0 percent or below in 2017? Will the supply-side support for the demand-side optimism be provided instead by a major rebound of productivity growth from the average of 1.2 percent over the past decade and 0.6 percent for the last four years, or perhaps by a reversal of the minus 0.8 percent growth rate since 2007 of the labor-force participation rate? The paper develops a new and surprisingly simple method of calculating the growth rate of potential GDP over the next decade and concludes that projections of potential output growth for the same decade in the most recent reports of the Congressional Budget Office (CBO) are much too optimistic. If the projections in this paper are close to the mark, the level of potential GDP in 2024 will be almost 10 percent below the CBO’s current forecast. Further, the new potential GDP series implies that the debt/GDP ratio in 2024 will be closer to 87 percent than the CBO’s current forecast of 78 percent. This paper also has profound implications for the Federal Reserve. The unemployment rate has declined rapidly, particularly within the last year. Faster real GDP growth will accelerate the decline in the unemployment rate and soon reduce it beyond any estimate of the constant-inflation NAIRU, even if productivity growth experiences a rebound and the labor force participation rate stabilizes. The macro economy is on a collision course between demand-side optimism and supply-side pessimism.
- Gordon, R. J. (2014) The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections. Working Paper 19895. National Bureau of Economic Research. doi: 10.3386/w19895.
The United States achieved a 2.0 percent average annual growth rate of real GDP per capita between 1891 and 2007. This paper predicts that growth in the 25 to 40 years after 2007 will be much slower, particularly for the great majority of the population. Future growth will be 1.3 percent per annum for labor productivity in the total economy, 0.9 percent for output per capita, 0.4 percent for real income per capita of the bottom 99 percent of the income distribution, and 0.2 percent for the real disposable income of that group. The primary cause of this growth slowdown is a set of four headwinds, all of them widely recognized and uncontroversial. Demographic shifts will reduce hours worked per capita, due not just to the retirement of the baby boom generation but also as a result of an exit from the labor force both of youth and prime-age adults. Educational attainment, a central driver of growth over the past century, stagnates at a plateau as the U.S. sinks lower in the world league tables of high school and college completion rates. Inequality continues to increase, resulting in real income growth for the bottom 99 percent of the income distribution that is fully half a point per year below the average growth of all incomes. A projected long-term increase in the ratio of debt to GDP at all levels of government will inevitably lead to more rapid growth in tax revenues and/or slower growth in transfer payments at some point within the next several decades. There is no need to forecast any slowdown in the pace of future innovation for this gloomy forecast to come true, because that slowdown already occurred four decades ago. In the eight decades before 1972 labor productivity grew at an average rate 0.8 percent per year faster than in the four decades since 1972. While no forecast of a future slowdown of innovation is needed, skepticism is offered here, particularly about the techno-optimists who currently believe that we are at a point of inflection leading to faster technological change. The paper offers several historical examples showing that the future of technology can be forecast 50 or even 100 years in advance and assesses widely discussed innovations anticipated to occur over the next few decades, including medical research, small robots, 3-D printing, big data, driverless vehicles, and oil-gas fracking.