What Would We Need for Persistent 5% Growth?

Last week, I argued that Governor Tim Pawlenty’s aspiration for 5% economic growth over a full decade is implausible since the United States has achieved such steady growth only once since World War II.

Over at Economics One, Stanford economics professor John Taylor offers a more positive take, defending the goal and offering a recipe for achieving it: 1% from population growth, 1% from employment growing faster than the population, and 2.7% from productivity growth.

Add it all up and you get 4.7% growth, a bit short of Pawlenty’s target but close enough for government work.

That sounds great, and I hope it happens, regardless of who is president. But let’s take a moment to kick the tires on Taylor’s assumptions.

Two seem fine:

  • His population growth assumption is perfectly reasonable. Indeed, it matches the estimate used by the President’s Council of Economic Advisers in its most recent Economic Report of the President (Table 2-2).
  • His productivity growth assumption is optimistic, but realistically so. Nonfarm productivity has grown at a 2.7% pace, on average, since 1996. Few analysts see that persisting. CEA forecasts assume 2.3%, for example. But the U.S. economy has demonstrated that 2.7% productivity growth is possible for a decade or more.

Three other assumptions are problematic.

  • Taylor uses a very optimistic assumption about how much employment growth can exceed population growth. Today, about 58% of the working age population has a job. That woefully low level ought to rise as the Great Recession recedes. Taylor assumes that we can boost that ratio back to its 2000 level of almost 65%. But 2000 was the tail end of a technology boom that lifted America’s employment-to-population ratio to record heights. Since then, the working population has aged, so the employment-to-population ratio will be persistently lower even in good times. CEA thus forecasts that labor force changes will trim about 0.3% annually from potential growth in coming years. Getting the employment-to-population ratio back up to 65% thus won’t happen unless we have an even bigger boom than the late 1990s delivered.
  • Taylor assumes that workers will keep working the same number of hours that they do today. That sounds innocuous except for one thing: average hours have been declining. CEA estimates that trimmed 0.3% per year from potential economic growth from 1958 to 2007 and will trim another 0.1% per year from 2010 through 2021.
  • Taylor assumes that the rest of the economy will enjoy the same productivity growth as the nonfarm business sector. In reality, the other parts of the economy – most notably government – are lagging behind. CEA estimates that slower productivity growth outside the nonfarm business sector trimmed 0.2% from potential economic growth from 1958 to 2007 and sees an even bigger bite, 0.4% annually, in the coming decade.

Taylor’s scenario thus assumes that everything breaks right for the U.S. economy for a full decade, with remarkable job growth and remarkable productivity growth in the economy as a whole. Not impossible but, unfortunately, not likely either.

9 thoughts on “What Would We Need for Persistent 5% Growth?”

  1. Based on all the data since GDP records began, one critical ingredient that’s missing to achieve persistent 5% growth is top marginal tax rates over 50%. Funny how rarely it’s mentioned that ever since top marginal rates dropped below 50%, we’ve had pretty anemic growth by historic standards. Turns out when taxes are low, the rich would rather take their money and have fun with it…when taxes are high, they’d rather get the deduction that comes from investing in their business and hiring more workers. It’s a simple matter of incentives.

  2. Government and Productivity is an anomaly. Government negates productivity. Ergo whatever Government does that slag in Productivity has to be picked up by the Private Sector. That is why we have the saying: “That Government is Best which is the Smallest”.

  3. Lofty goals are great—until they are not met. I wonder if JFK met the same sort of response when he proposed that we put a man on the moon? I was a young person then, but I don’t recall this amount of pushback to what then must have seemed unrealistically ambitious . Rather than judge Pawlenty by his goal, which strikes me as pretty ambitious, too, I think we should spend more time analyzing the specific policies he proposes to try to get us there.

  4. A little bit of National Accounting: production = demand = income.

    50% production increase = 50% demand increase = 50% income increase

    Part of the increase of production will have to be used to lower the deficit on the current account and turn it into a 1 or 2% surplus – 1 year of growth, with a much higher domestic savings rate which the government has to tax, to pay down the deficit.

    And the government will have to tax another 2 or 3%a year, too, to pay down the deficit – which will have to be accompanied by 2 to 3% of GDP in exports to sustain demand.

    That leaves about 42% of income increase. When population increases 10%, about 12% of this increase will be needed for these people. Which leaves 30%. This 30% will have to be spend on investments or consumption. If medical services rise with 5%-point of GDP in ten years this leaves 25%. When oil prices increase to 150 dollars a gallon, another 5% has to be used to pay the Saoudi’s. which leaves 17%. When unemployment goes down to 3%, about 12% of this is needed to pay the now employed people. That leaves 5% for an increase of household incomes – 0,5% a year. But suppose that growth will be 30%…

  5. Donald Marron blogs his musings on Economics, Finance and Life. It seems that this post is his musing on life, its immense but often ethereal possibilities. To me, with a bad case of reality check, this encounter with fairy tales is unreal. Pawlenty, my former governer, Taylor and now Marron – what are they inhaling that gives off the sweet smelling 5% smoke?
    – 2.7% productivity improvement – never before seen. Especially TFP.
    – Aging society – cannot increase per capita hours worked (a contributor to the past productivity growth).
    – 1% population growth, not what the census shows (especially after you account for the fact that about a third of population growth in the last decade was due to the presence of undocumented migrants – who will all be sent back once we find them). Without immigration reform, dream of 1% population growth. Immigration reform is not on any one’s agenda, we are terrified to deal with that problem,

  6. everything can be solved with more tax cuts for the rich and less regulations for corporations and businesses. The corporate media keeps telling me this on every news and talk show at every opportunity.

    It must be true, Larry Kudlow and Kramer both said it, Rush said it, and Neal Boortz too. Make the pie higher said a deranged George Bush (google it, its an actual quote, I’m not drunk when I write this, you can’t make this stuff up)

    As should be apparent even to economist who live in some bizarre alternate dimension that barely intersects the real world, we are in a structural depression. Yeah didn’t see it coming, like 2008 it just happened, wasn’t on the charts, rough patch, green shoots, all is fine don’t panic etc.

    What would we really need for a persistent 5% growth rate? An infinite world, with infinite resources and an infinite birth rate. We live in a finite world with diminishing oil, increasing populations and a currency/banking system built on systemic fraud and looting, referred to in polite society as a “fiat” based currency system. The only infinite resource we have is currency/money, hows that working out so far?

    Economist love metaphors cause it gives them a known structure to build their dream on, so how about we try the old garden. A tomato plant can’t grow forever. Birth, growth, flower, fruit, seed, death, its a cycle. It works, it makes sure every tomato in the world doesn’t exist at the same time. It allows infinite tomatoes in a finite world.

    Recession/depression exists for a reason and when they are suppressed, they are prolonged and new growth is inhibited. You want 5% persistent growth? Change the system, purge existing inventory, invent new technologies, actually fulfill the needs of a world starving, sleeping in hungry poverty, in darkness; and filth, instead of playing with empty financial instruments valued off of the value of yet another worthless contract or collateralized debt obligation. Finance has been a tool to extract wealth from the lowest and move it to the highest. When finance again becomes a mechanism to improve the lot of all mankind growth will indeed be a persistent 5%, until then machine will cannabilze itself as it feeds on its own tail.

    Is it any wonder no one can think outside the box, when your very livlyhoods depend on your continued ignorance of the larger world? Stop thinking about how to make a buck for your masters and start thinking about how to make the world better for everyone, rich and poor, smart and not so much. For now the dismal science remains a fairytale that excludes anything that doesn’t fit the model, so likely this bit of prose will fall on deaf ears, its not required reading and the writer is not I fear a real economist. oh my….

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