Why getting faster US economic growth is so difficult, in one chart
AEIdeas
The above chart, from a new report by San Francisco Fed research director (and maybe next SF Fed president) Mary Daly, is one of my favorites. It clearly shows why it is so much harder for the US economy to generate fast growth today versus the immediate postwar decades. America’s demographic tailwind is now a stiff headwind. Daly explains:
In the 1970s, labor force growth alone contributed 2.7 percentage points to GDP growth, meaning that even if productivity growth had been zero, the economy would have expanded at 2.7%, slightly faster than the pace of our current expansion. Since that peak, labor force growth has come down substantially. As the forecast for 2025 shows, labor force growth is expected to remain stuck at 0.5% for the next decade. This means that, absent a surge in productivity, slow growth in the labor force will be a restraining factor on the U.S. economic speed limit. . . .
Where have all the workers gone? Demographics play a big role in labor force growth, and at the moment many baby boomers are heading off for retirement. At the same time, the fertility rate has slowed: Put simply, people are having fewer babies. Together, these two factors explain a large share of the changes in labor force growth displayed in the graph. Notably, the United States is not unique in these respects. Population aging is a global phenomenon, and many industrialized nations have seen their birth rates fall.
So a few observations. First, if we want an economy that grows anywhere near as fast in the future as in the past, productivity growth will have to do the heavy lifting. (And that sure doesn’t seem to have been happening lately.) Second, even with changing demographics, policy is probably suboptimal for stronger labor force growth. (More people could yet join the workforce, and maybe older workers could work longer.) Third, let’s not forget about investing in our fellow Americans (that means, education).
