Whither Economic Growth?

• Author: Nicholas Crafts

Whither Economic Growth? Finance & Development, March 2017, Vol. 54, No. 1

Nicholas Crafts

The global optimism at the turn of the century has been replaced by fear of long-term stagnation

It seems like only yesterday that the so-called new economy was ascendant and growth expectations were buoyant. But today there is a widespread fear of a future of secular stagnation, in which very slow growth will be the new normal—especially in advanced economies. While it is clear that the turn-of-the-century optimism was not justified, it is also possible that today’s pessimism is excessive.

Current mainstream growth projections for the United States and the European Union over the medium term represent a marked slowdown from growth rates in the decades prior to the global financial crisis that began in 2008 (see table). Compared with 1995 to 2007, future US and European growth of real (after-inflation) GDP per person is expected to diminish by half, or worse. In each case, a serious weakening of growth in labor productivity (output per hour worked) is expected. Compared with the golden age of the 1950s and 1960s, the slowdown is even more pronounced, especially for Europe.

Slower growth in Europe and the United States has mixed implications for growth prospects in developing economies. Most obviously, on the negative side, it means less demand for these countries’ exports, so models of development based on export-led growth may need to be rethought. The slowdown may also reduce the availability of new technology across the world. On the other hand, it may imply a lengthy period of low real interest rates and redirection of capital flows away from advanced economies toward emerging markets with more promising investment opportunities. That could mean a continuation of rapid catch-up growth and a faster rise in their share of world GDP.

Inaccurate predictionsIt is, of course, not unknown for economists to make inaccurate predictions about future growth or to be slow to appreciate the scope for improved performance of productivity. Alvin Hansen, the founding father of the idea of secular stagnation, is a spectacular example. In his 1938 presidential address to the American Economic Association, he said technological progress was too weak to generate economic growth at a rate that would encourage investment and avert a future of sustained high unemployment. In fact, the halcyon period of US economic growth during the postwar economic boom was on the horizon. Even as Hansen was wringing his hands the economy was experiencing very rapid growth in total factor productivity—the portion of economic growth not explained by increases in capital and labor inputs and that reflects such underlying societal factors as technology and efficiency. Nearly half a century later, in 1987, on the eve of the revolution in information and communication technology, another leading US economist, Robert M. Solow (see “Residual Brilliance” in the March 2011 issue of F&D), lamented that “you can see the computer age everywhere but in the productivity statistics.”

Today’s pessimism, including a revival of Hansen’s secular stagnation thesis (see “Sluggish Future” in this issue of F&D) is based on...