Six fatal ‘headwinds’
In his NBER forecast of America’s future GDP growth, Gordon admits starting with a couple of biases favoring an optimistic outcome: First, he admits “pretending that the financial crisis did not happen” and, secondly, he allows that he is making a “heroic assumption that another invention with the same productivity impact of the Internet revolution is about to appear on the near-term horizon. Thus our starting point is quite optimistic.”
Gordon’s forecast begins with America’s average GDP growth rate of 1.8% from 1987-2007. From there, Gordon’s forecast is an “exercise in subtraction” with each of the following six headwinds reducing America’s future GDP growth by a percentage point, ultimately driving America’s future GDP down to 0.2%. Yes, that’s right back to where America’s economic growth rate was before 1750 and the Industrial Revolution.
Gordon’s NBER paper is a must-read, but here’s a summary of the six headwinds, as distilled by Bloomberg Markets:
1. Demographics: “As more and more U.S. baby boomers retire, the number of hours worked per person declines, and so does the growth in GDP per capita.” (Down goes GDP to 1.6%.)
2. Stagnant educational attainment: “The U.S lags behind other advanced industrial economies in reading, math and science.” (GDP growth drops to 1.4%.)
3. Rising income inequality: “From 1993 to 2008, the wealthiest 1% captured 52% of inflation-adjusted income gains.” (GDP falls to 0.9%.)
4. Globalization and information technology: “More and more skilled jobs in the U.S. are being automated or are shifting to low-wage countries. (Down further to 0.7% GDP.)
5. Energy and environment: “Possible U.S. efforts to combat global warming, such as a carbon tax, act as a drag on economic growth.” (GDP reduced to 0.5%.)
6. Massive household and government debt: “Spending money on debt repayments in the U.S. reduces funds available for productive economic activity. (GDP crashes at 0.2%.)
Gordon closes his NBER challenge on a lighter note: “There are more than enough provocative ideas in this article, but I conclude with another. My guess is that a Canadian or Swedish economist looking at the past and future of his or her country would not be nearly so alarmed. Why not? What are the differences in environment, resources, legacy history, policies, and culture that create their relative optimism? Experts [in other countries] are welcome to contribute their own reactions to this diagnosis of the successful ‘American century’ and the possibility that future economic growth may gradually sputter out.”
