Monday, July 10, 2017

The Future of Real GDP per Capita

Scott Sumner says "the neoliberal reforms after 1980 helped growth". He writes:

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

One may wonder how much more the economy might have slowed if not for those reforms. Perhaps here we have an answer: 0.76% more.

Graph #1: Natural Log of Real GDP per Capita (black) with Trend lines
2.4% Annual Trend Growth Rate for 1949-1973
2.1% Annual Trend Growth Rate for 1974-2007
1.34% Annual Trend Growth Rate for 2009-2016
Trend growth slowed 0.3% annual after 1973, from 2.4% to 2.1%. When the effects of the neoliberal reforms (or whatever) failed after 2007, trend growth slowed an additional 0.76%, falling to a 1.34% annual rate. The combined decline in the trend growth rate is 1.06%, more than a full percentage point below the 1949-1973 rate.

Based on these numbers, Sumner's story says growth would have slowed 1.06% without the neoliberal reforms, but instead slowed only 0.3% because those reforms were put in place.

In Sumner's next post after the one I quoted above, he considers the question Why did growth slow after 1973? His answer echoes that of Robert Gordon, who says "the life-altering scale of innovations between 1870 and 1970 cannot be repeated." An empty explanation.

Scott Sumner adds to Robert Gordon's story, diluting the meaning with extra words. "Here’s what I think happened," Sumner says:

There were a few underlying technological developments in the late 19th century that dramatically affected living standards in the 1920-70 period, when they were widely adopted in advanced economies. I would certainly include electric power and the internal combustion engine. I also think indoor plumbing is underrated. Imagine having to rely on outhouses in cold climates... Many key products were first invented in the late 1800s or early 1900s (electric lights, home appliances, cars, airplanes, etc) and were widely adopted by about 1973. No matter how rich people get, they really don’t need 10 washing machines. One will usually do the job. So as consumer demand became saturated for many of these products, we had to push the technological frontier in different directions. And that has proved surprisingly difficult to do.

Well, they had indoor plumbing in ancient Rome. But Scott Sumner's "surprisingly difficult to do" tells us no more than Robert Gordon's "cannot be repeated". The question "Why?" remains. And then, "Why 1973?"

More to the point, Sumner's explanation does not account for the second slowdown, the 2007-2009 slowdown. He has a different story for that one. Not enough money, he says. Print more money, he says. Increasing the Fed's balance sheet from 800 billion to 4.5 trillion was not enough, he says.

Two slowdowns, two explanations. But we don't need two explanations. "One will usually do the job."

The greatest weakness in Sumner's story is a weakness he shares with almost all modern-day economists: His argument is a hodgepodge of unrelated tales. In this case, a lack of invention after 1973, plus saturated demand, plus a difficult technological frontier. But then after 2007, tight money was the problem: 4.5 trillion, and still too tight.

The question "Why?" remains.

There is no "big picture" any more, no one overall theory that explains what's wrong with the economy. There has been no big picture since Keynes was rejected by the moderns. Only a hodgepodge of unrelated tales.

What's wrong with our economy is the excessive accumulation of private debt. That was the problem in 2007-09, and in 1973-74, and before, and since. One problem. One problem that never gets better and always gets worse. One problem, ignored by economists who know which side their bread is buttered on.

I can never resist the opportunity to criticize Scott Sumner's economics. But that's not what this post is about. This is not about the decline of economics. It's not even about the reasons for the decline of economic growth. This post is only about how big the decline of growth has been, and how things will look if the decline continues.

It seems there are two ways to think about how things will look if the decline continues. This is the wrong way:

Graph #2: Showing the Most Recent Trend Continuing
If we stay on track with the 2009-2016 trend, by the year 2100 RGDP per Capita will reach the level it would have reached by 2050 if we had stayed on track with the 1949-1973 trend.

But this graph does not show the continuation of decline. It shows only the continuation of the low-growth trend that resulted from the decline. The decline is the change in the rate of growth, from 2.4% to 2.1% to 1.34% and, unless things change, to a growth rate lower than 1.34% in the foreseeable future. That is the decline.

This is the right way to look at the decline:

Graph #3: A Repeating Decline in the Rate of Growth
Two factors affect the up-and-down on this graph: the changing slope of the red lines, and the drop after each red line stops. Two factors affect the left-and-right: the length of the red lines, and the duration of the gap between the red lines. Obviously I made these things up.

The black dots indicate the original source data. After the black dots die out in 2016, it's all just a guess. The last five red lines, including the one that started in 2009, are each shown as 20-year trends. You could change them if you want.

The gaps between the red lines, each is one year longer than the gap before. The gap you can't see (1973-74) is one year. And the 2007-2009 gap is two years. These are actuals. I stuck with the pattern and made the next gap three years, and the next gap four years, and like that. You can change them if you want.

If you change these things, you will stretch the graph out, left-to-right, or shorten it, left-to-right. But you won't change the up-and-down pattern. To change the up-and-down pattern you have to change the growth rates (the slopes of the red lines) or the drops after the red lines stop, or both. You can change those too, if you want, but you should be realistic.

The red line slopes 0.3% less after 1974 than before. Hard to see. After 2009 it slopes 0.76% less than before. Those are actuals. I was going to keep making the number bigger for the future slopes, but I decided against it. Instead, I went with the 0.76% additional decline each time. No one knows what those actuals will turn out to be, but assuming the most recent actual change each time provides a realistic estimate.

For the vertical drop at the end of each red line, I did something similar: Each drop is the same size as the 2007-2009 drop. That's as realistic as I can be here, estimating the future.

// The Excel file

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