Monday, March 25, 2013

Thinking about the rate of growth of GDP.

The Economist has a column this week questioning the rate of economic growth that may be expected in the United States.

Although the recession was the deepest since the second world war, the recovery has been a disappointment. In the three years since the end of the recession in mid-2009, growth averaged 2.2%, barely half the 4.2% average of the seven previous recoveries.
In part, this is because recoveries from financial crises face greater difficulties. 
Consumers are too much in debt; businesses cannot or will not spend; a damaged banking system stifles credit. But in its annual economic report, issued on March 15th, Barack Obama’s Council of Economic Advisers argues that this is not the whole story. The ......economy returns to an underlying trend rate of growth that is determined by the supply of workers, capital and technology. Mr Obama’s economists argue that the trend is now much lower than in the past.
Thus if the work force increases, it will tend to increase the GDP. U.S. population growth has slowed, but so too has the portion of the population entering the work force. It may be that some of the young people who are extending their education due to the poor job market will thereby increase their lifetime earnings and restore their contribution to GDP growth, but on the other hand young people who just can't get jobs for a few years wind up with lower incomes in future years as well.

Capital is defined as "financial assets", that is assets that contribute to the production of goods and services. Wealth that is simply idle does not do so. Today a lot of people are holding cash rather than investing, and others are investing in gold or art works. (Of course there seems to be more investment in human resources -- education -- which may yield future economic growth.) Note too that capital infrastructure can deteriorate, as the roads and bridges in the United States were allowed to deteriorate for too long.

A significant concern is the rate of growth of total factor productivity. These was a long stretch in which the Information revolution was improving the ways of doing things, yielding a relatively high rate of improvement of total factor productivity and thus of growth of GDP. It is questioned whether we will see the same high rate of reengineering of organizations, restructuring of markets and improvements of technology in upcoming years.

I have previously noted that if producers appropriate a smaller portion of the benefits of their work and consumers more, then the GDP suffers while that actual consumer value of the production may continue to increase rapidly. eBay, Amazon, Wikipedia, online newspapers and other innovations seem to be increasing consumer surpluses.

And of course, if people choose to consume fewer goods and services in order to improve the quality of their lives (e.g. longer vacations, more leisure, a simpler but happier life style) that reduces GDP but not happiness.

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