Secular Stagnation on the Supply Side: U.S. Producivity Growth in the Long Run

Secular stagnation refers not to the literal stagnation, i.e., stopping of economic growth but rather to the slowing of U.S. potential real GDP growth to half or less of its historical pace. The retardation of potential real GDP growth matters both because of its direct impact on the standard of living and also because of its indirect effect on net investment, which in turn feeds back to slower productivity growth. During the decade ending in 2014:Q4, U.S. real GDP grew at only 1.55% per year, almost exactly half the growth rate of 3.12% per year achieved during the previous three decades, 1974-2004, and an even smaller fraction of the 3.62% per year performance of 1929-1974. This paper predicts that slow growth of around 1.5% per year will continue over the next decade or two. Part of the slowdown in output growth is due to a decline in the growth rate of the working-age population. A second reason is a shift in worker hours per capita from an increase due to the entry of women into the labor force during 1965-1995 to a future decrease due primarily to the retirement of the baby-boom generation. A third reason is an ongoing slowdown in the growth rate of output per hour, from 1.72% per year during 1974-2004 to 1.10% per year in 2004-2014 and to an even slower 0.55% per year during 2009-2014. The sources of the decline in productivity growth combine diminishing returns that have set in following the ICT revolution of the 1996-2004 "dot.com" era with a decline in business dynamism, as the entry of new business firms has steadily declined over the past three decades relative to the exit of existing firms. Moore's Law describing the steady exponential increase in the number of transistors on a chip became obsolete a decade ago. The historic rise of educational attainment has slowed to a crawl, and the declining share of children growing up in two-parent families may lead to a future decrease in high-school completion and an increase in criminal activity among youth. While future productivity growth will be slower than before 2004, it will still continue as in the past decade at a rate slightly in excess of one% per year.