How fast can the economy grow?

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Article Highlights

  • Increases in labor productivity are a key determinant of the rise in potential output.

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  • Growth in potential output is really what matters for increasing the standard of living.

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  • At an annual growth rate of 2.25% since 1889, U.S. output per hour doubles every 31 years.

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Discussions about the economy tend to focus much more on the Fed’s latest program to stimulate spending and the drama on Capitol Hill than on the potential for the economy to generate higher income over the long haul. Yet, the growth in potential output is really what matters for the standard of living. And increases in labor productivity are a key determinant of the rise in potential output. Between 1889 and 2012 ― the longest span of time with reasonably consistent data― real output per hour worked in the United States rose about 2¼ percent per year on average. At this annual rate, output per hour doubles every 31 years, which implies roughly a 15-fold increase since 1889.

 

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Stephen D.
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