Is economic growth slowing down permanently?

[-1=e^ipi]

One thing that has been observed over the past 150 years is that the rate of economic growth in terms of real GDP per capita in developed countries has been roughly constant in the long run (at roughly 2%) per year. This 2% growth per year could be thought of as the rate of technological progress and developed countries could grow faster as they catch up to developing countries.

Constant US growth rate at 2% per year:

South Korea Transitioning from a developing to a developed country:

As a result, many economic models assume a constant long run growth rate and most governments, unions, corporations, etc. make decisions under the assumption that this exponential growth will continue. Since everyone alive today has been born in a society where a constant growth rate of 2% has occurred, most people assume it will continue and many expect their paychecks to rise every year.

Over the past decade however, the growth rate has significantly diverged from this long run growth rate of 2% and it doesn't look like it is recovering anytime soon. Not only that it, might be a long run trend. For example, if I take the logarithm of USA real GDP per capita data since 1950, a linear trend fits okay to the data, but a quadratic trend fits much better. And the quadratic trend suggests that economic growth is slowing down at a rate by about 0.4% per century. This isn't a trivial difference, it suggests that the rate of economic growth in developed countries will be about 1.6% over the next century, which means that in 100 years, developed countries will be about 45% poorer compared to if economic growth per capita stayed at 2% per year.

This also has significant implications about the sustainability of debt in most developed countries, especially when many governments (such as the Harper and Wynne governments) are making the assumption that growth rates will return to 2% per year to get out of deficit.

Are we taking the 2% growth rate for granted? Is there any reason to expect an exponential trend of real GDP per capita to continue forever? What is responsible for this observed long run slow down and should governments do anything about it?

[Moonlight Graham]

US GDP annual growth has been over 2% every year since 2010, except for 2011 (1.6%). No time to panic yet.

Forever is a long time, nobody can predict even centuries into the future. As long as resources are available and populations keep expanding I see no reason why GDP can't be more or less maintained in the next few decades though.

What's worrying is that our consumption and growth seems to be based on deeper and deeper debt, both personal debt and government debt, so it's costing us more and more just to maintain similar growth. That's a BAD trend.

[Shady]

2% growth is pretty slow.

[Bonam]

Technological progress is only speeding up, not slowing down. If the rate of GDP growth per capita is related to the rate of technological progress, I don't think it's going anywhere.

Furthermore, stats from the vantage point of 2015 look distorted due to the "lost decade" of the 2000s. One could have easily asked the same question, about whether growth is permanently slowing down, in the 1920s or in the 1940s, and yet things picked right back up shortly thereafter. As your graph shows, there were big deviations from the straight line before, and the current dip is far smaller than those experienced in the past.

Civilization is on the verge of major transformations in biotechnology, artificial intelligence, and nanotechnology. Much as the internet totally transformed society from the 1980s to today, other technologies will transform it over the coming decades. Even energy technologies, long mired in only linear progress while everything else advanced exponentially, are on the verge of important breakthroughs over the next few decades. All these technologies will generate unprecedented new opportunities for economic growth and productivity gains.

As for what governments can do about it... the best they can do is try to stay out of the way of technological innovation by not imposing overly burdensome regulations and restrictions, while funding scientific and applied research and education.

Edited August 27, 2015 by Bonam

[-1=e^ipi]

US GDP annual growth has been over 2% every year since 2010, except for 2011 (1.6%). No time to panic yet.

Nominal GDP growth is different from real GDP per capita growth. You have to factor population growth and inflation.

[bush_cheney2004]

Focusing so much on the U.S. or even "developed nations" is short sighted, as more growth will be seen in emerging markets:

[Bonam]

Focusing so much on the U.S. or even "developed nations" is short sighted, as more growth will be seen in emerging markets:

At some point China gets to be reclassified as "developed" and then you'll see a big jump in that graph.

[-1=e^ipi]

Focusing so much on the U.S. or even "developed nations" is short sighted, as more growth will be seen in emerging markets:

The economic growth rate of developing nations will slow down as their standard of living approaches that of developed nations, as has been observed by places like South Korean and Taiwan.

Technological progress is only speeding up, not slowing down. If the rate of GDP growth per capita is related to the rate of technological progress, I don't think it's going anywhere.

I'm not as optimistic as you. Demographic collapse is expected for most developed countries, too many developed countries have unsustainable levels of debt and have no plan to pay them off, the quality of education is degrading, students are learning 'social justice' and 'discovery math' rather than more useful skills, energy prices are going up in developed countries as they commit eco-suicide, there is a rise of islamism that isn't being countered effectively, etc.

[Bonam]

I'm not as optimistic as you. Demographic collapse is expected for most developed countries, too many developed countries have unsustainable levels of debt and have no plan to pay them off, the quality of education is degrading, students are learning 'social justice' and 'discovery math' rather than more useful skills, energy prices are going up in developed countries as they commit eco-suicide, there is a rise of islamism that isn't being countered effectively, etc.

Every generation there are various end of the world predictions made based on the problems of the day. Today's issues are small in comparison to those faced in the past.

- In the 60s-80s, there was the fear of global nuclear annihilation as part of the Cold War.

- In the 40s, we had an apocalyptic war that left many of the greatest nations of the day in ruins.

- In the 20s-30s, we had the depression.

As for the issues of today that you mention:

- Demographic collapse will become irrelevant in the face of skyrocketing life expectancies, as people will be able to work far longer. Secondly, less labor will be needed to begin with, as automation will continue to make many labor-intensive jobs obsolete.

- Debt is a problem but it's a paper problem only. Any country can simply declare bankruptcy with no measurable effect on its long term prospects, just a bit of short term pain for its creditors. Costs of borrowing will be a bit higher after the bankruptcy for a few years, then go back to what they were as people regain confidence in its economy.

- Public education includes some pretty dumb stuff in Western countries these days, yes, but meanwhile students in other parts of the world are learning more math and science than ever before. And, Western universities continue to produce people capable of impressive technological innovation.

- Educational fads like discovery math last long enough for people to realize just how badly they failed, then they slowly die away. The desire of parents to see their kids do well relative to other kids is enough to ensure this.

- Social Justice is an evil ideology, but it will eventually be relegated to the dustbin of history along with Nazism and Communism and all other ideologies that try to blame all of society's ills on a scapegoat race/class (in this case the white male)

- The fraction of GDP that Western economies spend on energy continues to decline, not rise

Edited August 27, 2015 by Bonam

[Freddy]

Yes until the oil patch starts up again. And manufacturing you ask? It will only return if Canadians get off their couches and start manufacturing something....... Ya, That's not going to happen.

As long as we keep running deficits creating jobs for the middle class we should be fine. By 2022 our oil will be ready for a restart.

Edited August 28, 2015 by Freddy

[-1=e^ipi]

And manufacturing you ask? It will only return if Canadians get off their couches and start manufacturing something.

You need competitive energy prices for that.

[Bonam]

You need competitive energy prices for that.

They are competitive in much of Canada.

[-1=e^ipi]

They are competitive in much of Canada.

Not in the largest province with most of the manufacturing ability.

[Freddy]

You need competitive energy prices for that.

who in their right mind would invest in buying manufacturing tools when it's likely the looney will jump back up to par any time oil prices go up.

[Topaz]

Don't you think at once all these free trade deals linking all the countries around the world are fully connected that once one country like China, for example, goes down the affect with hit all the rest like dominoes??

[Bonam]

Not in the largest province with most of the manufacturing ability.

That may be, but Ontario's issues are largely inconsequential to the larger question you posed in this thread about whether "economic growth is slowing down permanently". Global economic growth is driven mostly by the US and China.

Edited August 28, 2015 by Bonam

[-1=e^ipi]

Global economic growth is driven mostly by the US and China.

If we are talking about non-developed countries like China, then they will definitely slow down as they catch up to developed countries.

I was asking mostly about developed countries since that is more interesting as it is usually assumed that developed country long run economic growth is roughly constant.

[-1=e^ipi]

Random blog post by random economist I found which suggests labour productivity growth might be slowing down permanently:

http://blogs.ft.com/gavyndavies/2014/10/26/is-economic-growth-permanently-lower/

[Bonam]

If we are talking about non-developed countries like China, then they will definitely slow down as they catch up to developed countries.

I was asking mostly about developed countries since that is more interesting as it is usually assumed that developed country long run economic growth is roughly constant.

The US economy grew at a 3.7% annualized rate last quarter, while inflation remains close to zero. That's almost double the 2% long term rate you mention.

[WIP]

One thing that has been observed over the past 150 years is that the rate of economic growth in terms of real GDP per capita in developed countries has been roughly constant in the long run (at roughly 2%) per year.

This 2% growth per year could be thought of as the rate of technological progress and developed countries could grow faster as they catch up to developing countries.

I had a friend several years back who became an investment broker and was always driving me up the wall about "emerging markets" at the time. I didn't object to the notion that India and the Far East wouldn't show high economic growth. But I did not accept the part about India and China eventually becoming Americanized economies with cars and highways all over the place just like North America. Reason being that our extremely resource-intensive and wasteful economic system couldn't possibly function for long in countries that were already overpopulated with limited natural resource bases. So now, Indian cities have air they can't breath and a stagnating Neoliberal economy, and China has at least had the sense to realize that unbridled capitalism has caused them to hit the wall fast and part of their economic slowdown may in fact be due to the realization that air pollution is at critical levels, while they are losing water and arable land at increasing rates because of the change to mechanized, oil-based agriculture.

Looking at the global picture again, why would anyone not understand that economic growth can not go on forever on a finite world!

Edited August 28, 2015 by WIP

[-1=e^ipi]

The US economy grew at a 3.7% annualized rate last quarter, while inflation remains close to zero. That's almost double the 2% long term rate you mention.

That includes population growth and isn't a long term trend. Obviously growth can vary from quarter to quarter.

[-1=e^ipi]

Slightly related, but Moore's Law has completely broken down. Was nice while it lasted.

[msj]

Don't you think at once all these free trade deals linking all the countries around the world are fully connected that once one country like China, for example, goes down the affect with hit all the rest like dominoes??

David Rosenberg is quoted in the Financial Post today talking about China and Japan and the US economies.

As he put it (to paraphrase): Japan was the #2 economy from 1968 to 2010. During 40% of that time it was in recession. The US feared Japan back in the 1980's. Yet the recessions of 1990, 2001 and 2008 had nothing to do with Japan.

As for China, they represent 0.7% of US GDP and have their economy correlates to the US economy at 16% (i.e. not significantly).

Fortunately for Canada, while China may have some impact on commodity prices Canada correlates better with US growth.

So, to the extent that US growth recovers from the GFC then things should be ok.

Of course, Canada may have the burden of having excess private debt to deal with in a rising interest rate environment. That could be a head wind for us.

As to US growth: we shouldn't be surprised. Look up what happens when debt bubbles implode. Recoveries are long and slow which is what we have seen, isn't it?

But the US will grow again. And so will the world.

[Bonam]

Slightly related, but Moore's Law has completely broken down. Was nice while it lasted.

Cite?

I think we might see a little slowdown as manufacturers try to push to/past the 10 nm scale length due to the delays in the commercialization of EUV lithography machines, but it will resume when that is solved, and as we start to get more rapid development in alternative semiconductor materials, 3D circuits, and opto-electronics.

We're still many many orders of magnitude away from fundamental physical limits of computational density as predicted by information theory and I don't think we'll see Moore's law really break until we start asymptoting towards those limits.

[TimG]

We're still many many orders of magnitude away from fundamental physical limits of computational density as predicted by information theory and I don't think we'll see Moore's law really break until we start asymptoting towards those limits.

After 2 decades of constant growth clock speed has stalled at 3-4GHz. My understanding is the mechanics of power dissipation make further increases in clock speed implausible. The focus in the last 10 years has been on mobile devices which run at slower clock speeds but draw less power and on increased parallelism with multiple cores. IOW, transistors may continue to shrink but we are not seeing the same jumps in computing performance as we did in the past which leads some to conclude that Moore's Law has reached a saturation point. Edited August 28, 2015 by TimG