THE ACADEMY OF BUSINESS STRATEGY – AMERICAN GROWTH
Article by Dr. Phillip London DBA MBA FCCA
An economy’s long-term growth potential is measured by the pace at which GDP can expand without affecting unemployment and, hence, inflation. It is determined by growth in the supply of labour along with the speed with which productivity improves. The pace of potential growth helps determine the sustainability of everything from public debt to the prices of shares. Unfortunately, the outlook for America’s potential growth rate was darkening long before the financial crisis hit. The IT-induced productivity revolution, which sent potential output soaring at the end of the 1990s, has waned. More important, America’s labour supply is growing more slowly as the population ages, the share of women working has peaked as has that of students whose work has fallen. Since 1991 the labour supply has risen at an average annual pace of 1.1 percent. Over the next decade the Congressional Budget Office expects a 0.6 percent annual increase. According to Robert Gordon, a productivity guru at Northwestern University, America’s trend rate of growth in 2008 was only 2.5 percent, the lowest rate in its history, and well below the 3-3.5 percent that many took for granted a few years ago. Without factoring in the financial crisis, Mr. Gordon expects potential growth to fall to 2.35 percent over the coming years. That alone is grim news. But has the Great Recession made things worse? In theory, it could do. Slumping investment may slow the pace of innovation. Soaring government debt could raise interest rates. Higher taxes, designed to reduce the debt, might dull incentives to work and invest. More regulation, in finance and beyond, could deter innovation. Workers’ skills may be depleted as a result of joblessness. On the plus side, well-targeted government spending on, say, infrastructure or education could boost potential output, while the huge wealth that Americans have lost may induce more of them to work for longer. History sends mixed signals about how much these effects matter. Surprisingly, the 1930s bode well. Despite the deep slump in growth and investment, America’s potential growth rate is reckoned to have risen smartly during the decade, as innovations from nylon to synthetic rubber proliferated, while business processes were fundamentally overhauled. Alexander Field, an economist at Santa Clara University, has called the 1930s the “most technologically progressive” decade of the 20th century. In the modern era Sweden offers grounds for optimism.… Continue reading