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In a previous article, Administration Forecast of U.S. GDP Growth, we looked at the Obama Administration’s forecast for growth of potential GDP and actual GDP from the 2011 Economic Report of the President. The administration forecast had seven components of potential GDP growth. For reference, we repeat the table showing the seven components of GDP growth.
Data from 2011 Economic Report of the President
In this article, we’ll look at line 6 output per hour (productivity, nonfarm business).
Sources of Productivity Growth
Productivity is the biggest driver of GDP growth, and is the main driver of growth GDP per capita. This is where quality of life improvement comes from.
The next figure shows the growth rate of productivity since 1948. The mean is 2.27% p.a. Min and max are -1.60% and 6.70%
| Source of Growth | What it is | What is Required |
|---|---|---|
| Deepening of Physical Capital | Capital formation | Savings and Investment |
| Deepening of Human Capital | Skilled workforce | Education, training and experience |
| Technological Advances | New technology, better materials, better methods | Produce new scientists & engineers, fund basic scientific research, R&D, encourage innovation |
The CEA forecast of 2.3% assumes that productivity will increase at the same rate as it has in the past. Is that a reasonable assumption?
Capital formation depends on investment. Investment equals savings. So the deepening of capital ultimately depends on the saving rate, which is the surplus of output over consumption. During the 2000’s, the saving rate in America fell to record lows. Many Americans were living beyond their means, spending more than they produced and making up the difference with borrowing.
Most of the population growth in the past few decades has been through net immigration, and much of it is from Mexico and central America. Many of the new immigrants are poorly educated and the literacy rate is low. That means they’re only qualified for low-paying, unskilled jobs like manual labor. If the skill level if the workforce goes down, productivity goes down.
Technology advances need trained scientist and engineers for research and development. Is the U.S training enough new scientists? If you look at graduate schools in science and engineering in the U.S., the majority of students are foreign. If they go back to their home countries after graduating, they won’t become part of the U.S. workforce.
What do American students study? Many go to film school hoping to become the next Steven Spielberg. Unfortunately, Hollywood doesn’t need 10,000 Steven Spielbergs.
