The coming of peak gross domestic product?

AuthorLindsey, Brink

Could economic growth come to an end in the next fifty years? Think whimper, not bang: A civilization-ending catastrophe isn't what I have in mind. Instead, the question is whether in the United States and other advanced countries growth as we have come to understand it could simply exhaust itself.

Speculation along these lines has become popular in the years since the Great Recession. Economist Robert Gordon (2012) of Northwestern has argued provocatively that the best days of technological innovation are already behind us. Meanwhile, Lawrence Summers (2014) of Harvard raises the prospect of "secular stagnation," in which a mismatch between savings and investment results in chronically anemic aggregate demand.

I want to explore another possibility. Let's assume that innovation continues to chug along and that opportunities for private investment suffice to keep secular stagnation at bay. Even so, I see a couple of scenarios in which growth as conventionally understood might come to an end. In both cases, the mechanism for growth's demise is the same: an ongoing decline in labor hours per capita. But whether this decline would be cause for celebration or sorrow depends on which workers reduce their labor hours and why.

When we talk about economic growth, we are typically referring to growth in the value of gross domestic product (GDP)--or, more precisely, to growth in real (i.e., inflation-adjusted) GDP per capita. To be sure, it is an imperfect measure. The calculation of GDP for any given year rests on a host of difficult methodological decisions; resolving those methodological issues in other, equally plausible ways would result in very different final figures. Just as daunting, if not more so, is the challenge of converting changes in nominal GDP from year to year into increases or decreases in real output. The price indexes used to make the conversion are increasingly sophisticated, but adjusting for quality improvements and the introduction of entirely new products ultimately comes down to educated guesswork.

Notwithstanding these difficulties, my judgment is that trends in real GDP do give us useful information about changes in the overall size of the "cash nexus"--that is, the market value of traded goods and services. Although some argue the point, I don't believe the measurement problems are getting worse over time; if anything, unmonetized welfare gains (what economists refer to as consumer surplus) were probably much bigger in the past. Consider, for example, the colossal improvements in well-being made possible by the rapid increase in life expectancy during the first half of the twentieth century. According to calculations by Kevin Murphy and Robert Topel of the University of Chicago, between 1900 and 1950 those gains alone were roughly equal to the value of all measured output (2006, 891). I am quite confident that this unmeasured leap in material welfare dwarfs all the considerable thrills we get out of our smartphones these days. So if the numbers say that growth in GDP per capita is declining or has stopped, I think those numbers are telling us something important.

GDP per capita can be broken down into two basic components: labor hours per capita and output per worker-hour. Accordingly, if labor hours per capita start to decline, output per worker-hour must rise just to keep GDP from shrinking. Growth can occur only if the rise in labor productivity (output per worker-hour) outpaces the fall in labor hours.

The decline in labor hours per capita is no mere theoretical possibility. Between the first decade of the twentieth century and the early 1960s, annual hours worked per capita fell from more than 1,000 to less than 800 as the workweek shortened and young people exited the workforce to attend high school and, increasingly, college (Lindsey 2013, fig. 2). During this period, productivity growth was so robust, however, that real GDP per capita grew at roughly 2 percent a year in spite of the curtailment in work effort. From the mid-1960s to the end of the century, the combination of the Baby Boom and surging labor-force participation by women drove annual hours worked per capita back up again, ultimately exceeding...

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