But what if slow growth instead reflects great economic success? That’s the provocative thesis of a new book, cleverly titled “Fully Grown,” by economist Dietrich Vollrath of the University of Houston. Vollrath not only offers the proverbial two cheers for slower growth rates, but also explains why many oft-proposed policy solutions are not likely to rekindle rapid growth.
Vollrath starts with the fact that annual growth in real gross domestic product per capita averaged 2.25 percent between 1950 and 2000 — but only 1 percent thereafter.
Since economic growth is the result of increases in the quantity and quality of human capital (also known as labor) and physical capital, plus a “residual,” also known as productivity, slower growth in one or more of those three must be behind the 21st-century slowdown, Vollrath argues.
Sure enough, due to declining post-baby boom fertility rates and resultant societal aging, per capita human capital has been shrinking at an average rate of 0.15 percent since 2000, after rising at nearly 1 percent per year between 1950 and 2000.
Meanwhile, the service sector has grown far more quickly than the goods-producing sectors, and productivity gains are notoriously difficult to achieve in services.
Health care, for example, accounted for 17.7 percent of GDP in 2018, but economists struggle even to measure the productivity of a nurse or doctor, let alone to boost it.
Taken together, these two developments account for 1 percentage point of the 1.25-point drop in average growth per capita over the past 20 years. The remaining 0.25 points reflects a modest decline in economic dynamism, as measured by the decreasing mobility of workers from one labor market to another, and somewhat slower reallocation of investment from lower- to higher-productivity businesses.
Yet both smaller families and higher consumption of services bespeak great economic success, Vollrath argues.
People chose to have smaller families in part because rising wages made “parental time . . . more valuable” — too valuable, ironically, to spend it all at home with the children. Relatedly, women gained reproductive rights and more equality in the labor market, also signs of social advancement.
As for the shift to services, that was the natural consequence of a goods-producing sector so fantastically productive that it could supply Americans with an ever more vast supply of stuff at an ever-lower cost in real terms. With the leftover disposable income, people pay for everything from restaurant meals to cosmetic dentistry.
You might as well celebrate these developments, because according to Vollrath there is very little anyone can do in the short run to reverse them — especially the decline in fertility, which is part of a demographic transition characteristic of late-capitalist societies around the world.
Vollrath’s book helps us understand why the returns, in terms of higher growth, from Trump’s tax cuts and deregulation, like those of Republican presidents before him, have been relatively paltry; even if they gave the U.S. economy a short-term boost, they are unlikely to create a structural shift in growth potential.
Nor, if Vollrath is right, would the preferred policy instrument of Summers and others — massive new infrastructure spending — change the trajectory.
Indeed, Vollrath is an ideologically evenhanded debunker, arguing contrary to the GOP that regulation and taxes have marginal influence on growth, compared with demography and productivity, and that the Democratic left’s top concern, inequality, is also not to blame.
There are good reasons for concern about how the fruits of growth are being distributed, he acknowledges, but the relatively stagnant share of income captured by the bottom 90 percent of earners in the past 60 years explains little of either the drop in labor supply or the shift from goods to services.
Vollrath has a choice word for politicians’ claims that tax cuts or spending increases “pay for themselves” in higher growth: “fatuous.” Beyond maintaining a steady supply of high-quality human capital via increased skilled immigration, and deregulating housing markets to accommodate workers moving to high-productivity locales such as Silicon Valley, Vollrath makes few policy recommendations.
His main suggestion, perhaps uncharacteristically for a dismal scientist, is to look on the bright side: “Slow growth, it turns out, is the optimal response to massive economic success.”