Has the Long-run Growth Rate Changed?

NOTE: The Growth Economics Blog has moved sites. Click here to find this post at the new site.

My actual job bothered to intrude on my life over the last week, so I’ve got a bit of material stored up for the blog. Today, I’m going to hit on a definitional issue that creates lots of problems in talking about growth. I see it all the time in my undergraduate course, and it is my fault for not being clearer.

If I ask you “Has the long-run growth rate of the U.S. declined?”, the answer depends crucially on what I mean by “long-run growth rate”. I think of there as being two distinct definitions.

  • The measured growth rate of GDP over a long period of time: The measured long-run growth rate of GDP from 1985 to 2015 is {(\ln{Y}_{2015} - \ln{Y}_{1985})/30}. Note that here the measurement does not have to take place using only past data. We could calculate the expected measured growth rate of GDP from 2015 to 2035 as {(\ln{Y}_{2035} - \ln{Y}_{2015})/20}. Measured growth rate depends on the actual path (or expected actual path) of GDP.
  • The underlying trend growth of potential GDP: This is the sum of the trend growth rate of potential output per worker (we typically call this {g}) and the trend growth rate of the number of workers (which we’ll call {n}).

The two ways of thinking about long-run growth inform each other. If I want to calculate the measured growth rate of GDP from 2015 to 2035, then I need some way to guess what GDP in 2035 will be, and this probably depends on my estimate of the underlying trend growth rate.

On the other hand, while there are theoretical avenues to deciding on the underlying trend growth rate (through {g}, {n}, or both), we often look back at the measured growth rate over long periods of time to help us figure trend growth (particularly for {g}).

Despite that, telling me that one of the definitions of the long-run growth rate has fallen does not necessarily inform me about the other. Let’s take the work of Robert Gordon as an example. It is about the underlying trend growth rate. Gordon argues that {n} is going to fall in the next few decades as the US economy ages and hence the growth in number of workers will slow. He also argues that {g} will fall due to us running out of useful things to innovate on. (I find the argument regarding {n} strong and the argument regarding {g} completely unpersuasive. But read the paper, your mileage may vary.)

Now, is Gordon right? Data on the measured long-run growth rate of GDP does not tell me. It is entirely possible that relatively slow measured growth from around 2000 to 2015 reflects some kind of extended cyclical downturn but that {g} and {n} remain just where they were in the 1990s. I’ve talked about this before, but statistically speaking it will be decades before we can even hope to fail to reject Gordon’s hypothesis using measured long-run growth rates.

This brings me back to some current research that I posted about recently. Juan Antolin-Diaz, Thomas Drechsel, and Ivan Petrella have a recent paper that finds “a significant decline in long-run output growth in the United States”. [My interpretation of their results was not quite right in that post. The authors e-mailed with me and cleared things up. Let’s see if I can get things straight here.] Their paper is about the measured growth rate of long-run GDP. They don’t do anything as crude as I suggested above, but after controlling for the common factors in other economic data series with GDP (etc.. etc..) they find that the long-run measured growth rate of GDP has declined over time from 2000 to 2014. Around 2011 they find that the long-run measured growth rate is so low that they can reject that this is just a statistical anomaly driven by business cycle effects.

What does this mean? It means that growth has been particularly low so far in the 21st century. So, yes, the “long-run measured growth rate of GDP has declined” in the U.S., according to the available evidence.

The fact that Antolin-Diaz, Drechsel, and Petrella find a lower measured growth rate similar to the CBO’s projected growth rate of GDP over the next decade does not tell us that {g} or {n} (or both) are lower. It tells us that it is possible to reverse engineer the CBO’s assumptions about {g} and {n} using existing data.

But this does not necessarily mean that the underlying trend growth rate of GDP has actually changed. If you want to establish that {g} or {n} changed, then there is no retrospective GDP data that can prove your point. Fundamentally, predictions about {g} and {n} are guesses. Perhaps educated guesses, but guesses.

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2 thoughts on “Has the Long-run Growth Rate Changed?

  1. Pingback: Forecasting Future Growth | The Growth Economics Blog

  2. Pingback: Labor’s Share, Profits, and the Productivity Slowdown | The Growth Economics Blog

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