Slower U.S. Growth in the Long- and Medium-Run.

• Author: Gordon, Robert J.
• Position: Research Summaries

The annual growth rate of U.S. percapita real GDP remained remarkably steady at 2.1 percent between 1890 and 2007. Until recently, it was widely assumed that the Great Recession of 2007-09 and the slow recovery since 2009 represented only a temporary departure from that steady long-run growth path. Growth theory, which tends to take the economy's underlying rate of technological change as exogenous, was consistent with the wide-spread expectation that in the long run the economy's growth rate would soon return to the longstanding 2 percent annual rate.

In a series of research papers dating back 15 years, I have questioned the presumption of a constant pace of innovation and technological change. More recendy, in several papers I have described a variety of "head-winds" that are in the process of slowing the economy's growth rate independendy of the contribution of innovation. Taken together, these headwinds and a slowing pace of innovation lead me to predict that the economy's long-run rate of growth of per-capita real GDP over the next 25 years or so will be 0.9 percent, less than half of the historic pre-2007 rate of 2.1 percent. And that 0.9 percent will not be available to most of the population, as growing inequality will cause a disproportionate share of available output growth to accrue to those whose incomes fall in the top one percent of the income distribution. Growth of per-capita real income for the bottom 99 percent of the income distribution will be 0.5 percent per year or less.

This research summary begins with a look at the factors involving innovation and the headwinds that are in the process of reducing long-run growth. A subsequent section describes a new technique to estimate the growth rate of the economy's underlying potential output, an analysis which concludes that the economy's potential growth rate falls well short of that currendy assumed in the projections of the Congressional Budget Office (CBO).

The Pace of Innovation and the "One Big Wave"

Any treatment of U.S. long-run growth must distinguish between productivity and per-capita output. While these two measures of the growth process are sometimes treated as interchangeable, they are not. The growth rate of output per person equals the growth rate of output per hour plus the growth rate of hours per person. While per-person output growth was relatively steady over the entire period between 1890 and 2007, growth of output per hour and of hours per person were not. In particular, labor productivity experienced a half-century of rapid growth between 1920 and 1970, then slowed markedly after 1970. This productivity growth slowdown did not dampen the growth rate of per-person output because the growth of hours per person was bolstered by the entry to women into the labor force.

The basic measure of the pace of innovation in an economy is the growth rate of total factor productivity (TFP), which is calculated by subtracting from labor productivity growth both the contribution of growth in the capital-labor ratio (capital deepening) and the effect of higher educational attainment. Because...