Economic growth grinding down.

• Author: Lindsey, Brink
• Position: Economics

FOR MORE THAN a century, the trend line for the long-term growth of the U.S. economy has held remarkably steady. Notwithstanding huge changes over time in economic, social, and political conditions, growth in real gross domestic product per capita has fluctuated fairly closely around an average annual rate of approximately two percent. Looking ahead, however, there are strong reasons for doubting that this historic norm can be maintained.

The great macroeconomic disturbances of the 20th century gave rise to gloomy predictions that the bad times were here to stay. During the Great Depression, Keynesian "secular stagnationists" claimed that slowing population growth and the maturation of the industrial economy meant that the private sector no longer was capable of generating robust growth. Future prosperity, in their view, would require increasingly massive government spending. During the stagflation of the 1970s, there was widespread hand wringing about "limits to growth." Heightened awareness of environmental degradation, combined with a sharp spike in oil prices, led many people to believe that tightening resource constraints would make the growth rates of the past unsustainable.

Now, in the first great macroeconomic disturbance of the 21st century, talk of a prolonged slump once again is in the air. In his provocative 2011 book, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, Tyler Cowen, professor of economics at George Mason University, argues that the "low-hanging fruit" of easy growth already has been consumed and that the slowdown in productivity growth and median income gains over the past few decades is the "new normal." Meanwhile, a much-discussed 2012 paper by Robert Gordon--professor of social sciences at Northwestern University--speculates that the 250-year era of modern economic growth may be coming to an end. In reaching their pessimistic conclusions, Cowen and Gordon lean heavily on the controversial contention that we quite simply are running out of big new ideas for improving consumer welfare.

Looking at the 1930s and 1970s, we now can see that the doomsayers back then were confusing temporary cyclical reverses with long-term structural barriers to growth. Fortified by that experience, it is tempting to dismiss contemporary growth pessimism as yet another case of the boy who cried wolf. It is worth remembering, however, that the wolf does show up at the end of the story. So, is it possible that, notwithstanding false alarms in the past, the doom-and-gloomers have a point this time? I believe they do.

The evidence is strong that conditions for long-term economic growth in the U.S. are decidedly less favorable today than they were in decades past. Consequently, holding public policies constant (a very important conditional) we should expect growth rates in the foreseeable future--say, the next couple of decades--to be lower than those that prevailed throughout the 20th century.

It is important to note the time horizons of this assessment. I am not focused here on possible short-term factors that may be contributing to the current weak recovery from the Great Recession--for instance, a continued shortfall in aggregate demand or deleveraging in the wake of a serious financial crisis. At issue here is not the gap between current and "potential" or full-employment output, but rather the gap between the future growth rate in potential output and the long-term historical trend line.

Most of the discussion sparked by Cowen and Gordon has focused on their claims that big new technological breakthroughs have been petering out. However, the case for pessimism about U.S. growth prospects presented here does not rest on such claims. Rather, a close empirical examination of long-term and recent trends in the conventionally measured components of economic growth reveals that all of those components have been weakening. A quick turnaround in enough of those sources to keep the U.S. economy on its prior long-term growth path appears distinctly improbable. As a result, the sluggish performance of the economy since the Great Recession is likely to persist in the coming years.

To understand the basis for this conclusion, let us break down measured economic growth (typically expressed as the annual rate of increase in real, or inflation-adjusted, gross domestic product per capita) into the constituent elements tracked by conventional growth accounting: growth in labor participation, or annual hours worked per capita; labor quality, or the skill level of the workforce; capital deepening, or the amount of physical capital invested per worker; and the so-called total factor productivity, or output per unit of quality-adjusted labor and capital.

Over the course of the 20th century, these various components fluctuated in their contributions to overall growth. The fluctuations, however, tended to offset each other, so that the long-term trend line of real per-capita growth held remarkably steady at around two percent per year. In the 21st century, this pattern of offsetting fluctuations has come to a halt as all growth components have fallen off simultaneously.

Hours worked per capita had been buoyed by a rising labor force participation rate caused by the century-long influx of women into the paid work force, but labor force participation began falling from its 2000 peak even before the Great Recession and has plunged since then. Even if we get back to the old peak, further progress will be difficult--and further progress on the scale of past gains is mathematically impossible.

Labor quality or skill levels benefited from big increases in formal schooling during the 20th century but, more recently, gains in educational attainment have slowed and, in some cases, even gone in reverse. The high-school graduation rate actually is lower today than it was in the early 1970s, while growth in the college completion rate since 1980 has been much slower than over the prior decades. Meanwhile, the rate of net investment in physical capital has been slipping steadily for decades, dragged down by a falling savings rate. Total factor productivity growth, after collapsing in the 1970s, revived for a decade beginning in the mid 1990s, but has slumped again since then.

The simultaneous weakening of all the components of economic growth does not mean that slow growth is inevitable from here on out. The trends for one or more of them could reverse direction tomorrow. Nevertheless, it is difficult to resist the conclusion that the conditions for growth are less favorable than they used to be. The rise in labor participation during the 20th...