Moving Beyond Stagnation

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Moving Beyond Stagnation

According to a recent report from JPMorgan Chase, America needs to get used to long-term economic growth of 1.75 percent, rather than our historic growth rate of 3.5 percent.1 That conclusion contradicts the views of the Trends editors2 and the experts at the McKinsey Global Institute.3

As we all know, the simplest and most meaningful definition of economic activity is “the product of labor hours worked, times output per labor hour.”

  • One way to increase growth, then, is to increase the number of labor hours worked, either by increasing the number of people in the labor force or the number of hours worked per person.
  • The other solution is to boost productivity by adding capital to labor, in the form of intellectual property or plant and equipment, to increase the amount of output generated in each hour worked.

Since nobody questions this fundamental truth, why have the economists at JPMorgan Chase, Michael Feroli and Robert E. Mellman, reached such a different conclusion than the Trends editors or the MGI experts?

It starts with their gloomy view of labor force expansion. This has two components, one having to do with economic circumstances and the other having to with demography.

Based on Census projections, Feroli and Mellman note that growth in the traditional working-age population has slowed and will continue to slow; official numbers report a 0.92 percent annual growth rate in 2012, falling to an average growth of 0.84 percent over the next five years, and to just 0.51 percent annual growth in 2050.

Unless there is a significant reversal either in immigration patterns or birth rates, the number of so-called “prime working-age adults” in the United States will expand a lot more slowly than it has in the past—and those demographic reversals don’t look very likely.

The other determinant of the pace of economic growth is productivity. Here, the Feroli and Mellman analysis also points to pessimism. Worker productivity has been rising at only a 0.7 percent annual rate over the past three years, compared with the 2.25 percent post-World War II average pace. The JPMorgan Chase researchers attribute that largely to companies slashing R&D since the financial crisis.

To illustrate the impact, they go on to cite prices for information technology products that are not falling at the rate they were just a few years ago, suggesting the rate of IT advancement isn’t what it has been.

As Feroli and Mellman write, “Gains in information technology are routinely credited with the strong growth in the supply side of the U...

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