Abstract
The answer to the question “What will future potential growth be?” is as important as it is unknowable. This paper attempts to predict future U.S. potential output growth by combining what is unknown (future productivity growth, the performance of the labor market) with what is known (the evolution of the age structure of the population). It does so in two ways. First, this paper uses the historical experience of potential labor productivity growth, labor force participation, and weekly hours to simulate a range of outcomes for future potential growth—finding a 90% confidence interval that ranges from 0.7% annual growth to 3.0% annual growth, centered by construction around the Congressional Budget Office projection of 1.8% annual growth. Second, the paper examines a range of specific economic policies that the Trump Administration might pursue in terms of their impact on economic growth both in the short run and over the next decade—finding that an outer bound of these policies could be plus or minus 0.5 percentage point on the annual growth rate, but that these policies would most likely subtract a small amount from growth.
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Source Bureau of Labor Statistics, Productivity and Costs; author’s calculations
Source Bureau of Labor Statistics, Current Population Survey; Congressional Budget Office; author’s calculations
Source Bureau of Labor Statistics, Current Population Survey; Social Security Administration; author’s calculations
Source Bureau of Labor Statistics; Congressional Budget Office; Social Security Administration; author’s calculations
Source a Congressional Budget Office; author’s calculations. b Bureau of Labor Statistics, Current Population Survey; Congressional Budget Office; Social Security Administration; author’s calculations
Source Bureau of Labor Statistics, Current Population Survey; author’s calculations
Source Noland et al. (2016); author’s calculations
Source Nunns et al. 2016; author’s calculations
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Notes
Because data for a number of supply-side inputs to potential GDP are not available quarterly on a seasonally adjusted basis, the analysis that follows uses changes in annual averages (rather than fourth-quarter-to-fourth-quarter changes) for estimates and forecasts of inputs and potential GDP.
Note that output per hour worked, or labor productivity, in this equation covers the entire economy. Historically, annual labor productivity growth in the economy as a whole has averaged 0.3 percentage point below labor productivity growth in the non-farm business sector, the more common measure reported on a quarterly basis by the Bureau of Labor Statistics (BLS), because the former includes sectors, like government, with relatively slower (or even zero) productivity growth. In the analysis that follows, I apply this historical “wedge” of 0.3 percentage point to estimates of future potential productivity growth to derive a measure of economy-wide potential productivity growth.
CBO (2017) projects that the effects of generational, disability, and marriage trends, which tend to push down labor force participation rates will be roughly offset by increasing educational attainment, the changing racial and ethnic composition of the population, and increasing longevity on an age–sex-adjusted basis.
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The author thanks Harris Eppsteiner and Wilson Powell III for outstanding research assistance.
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Furman, J. What is the potential growth rate of the U.S. economy, and how might policy affect it?. Bus Econ 52, 158–167 (2017). https://doi.org/10.1057/s11369-017-0041-5
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DOI: https://doi.org/10.1057/s11369-017-0041-5