With the release of the Trump administration’s budget, increased attention has been paid to the question of economic growth. The budget forecasts real economic growth of about 3 percent a year — which is within the norms of the second half of the 20th century but well below the average of the past 15 years.
This optimistic growth projection has provoked snorts of derision from some professional economists, many of whom forecast slower growth. In his recent article on the homepage, Kevin Williamson rightly argues that policymakers can’t just blindly trust in high levels of growth to balance budgets; a growth number might be impossibly high, and hoping for more growth is not the same thing as putting in place policies that will deliver it. And it’s doubtful that another round of tax cuts targeting high-income earners will deliver the kind of growth that the Trump administration projects under its budget. Williamson also helpfully distinguishes between real GDP growth (the growth of the size of the economy as a whole) and real GDP growth per capita (the increase in economic activity per resident). He finds that, if the U.S. wants to hit high growth rates, it might have to consider efforts to expand its population, which would cause the economy as a whole to grow.
But we shouldn’t forget that per capita economic growth still probably needs to be improved (not that Williamson says otherwise!). When we compare the post-2000 era to 1947–2000, a huge divergence in GDP growth per capita emerges. Between 1947 and 2000, inflation-adjusted GDP per capita grew a little over 2 percent a year. Since 2000, it has grown at about 0.9 percent a year. So, GDP growth per person has more than halved since Y2K. This slowdown in per capita GDP growth is unprecedented in the postwar era. In no 15-year period between 1947 and 2000 did average annual GDP growth per capita fall below 1.5 percent, so a 15-year stretch of under 1 percent is a radical departure from recent history.
It’s possible that demographic factors have had some influence on the trajectory of GDP per capita, but the fluctuations of this trajectory match up with broader events in the economy and the decisions of policymakers. Vigorous growth continued throughout the late ’90s. There was a faltering in 2001 and 2002 in the lead-up to and the aftermath of the 2001 recession. Growth returned to 20th-century expansionary norms during a brief period in 2004 and 2005, at the apex of the credit orgy. It then collapsed. Since 2006, not a single year has reached the average annual per capita GDP growth of 1947 to 2000. The overall economy has also limped along over the past decade and a half.
The causes of this slowdown remain up for debate. A Trumpian might argue that trade policies and illegal immigration have driven down wages and thereby limited economic growth. Others might blame it on over-regulation, the increasing financialization of the economy, the need for a more highly trained workforce, or resistance to reform on the part of major economic institutions. The cause of this stagnation might be some combination of those factors or some other factors. However we diagnose this problem, it seems likely that events and policy decisions have contributed to this slowdown. If per capita GDP growth and the incomes of working- and middle-class Americans increase, that prosperity might also help increase the birthrate; a vibrant economy doesn’t always lead to more births, but extended economic decline usually does take a toll on the birthrate (many studies have shown a decline in birthrates after the Great Recession).
All this suggests that policymakers could take steps to help increase GDP per capita. That enterprise, though, might require sacrificing policy nostalgia in order to focus on the problems of the present. If we want ’80s-level growth, we’ll probably need more than ’80s-style policies.